Apartment Market Analysis
Rents continue to fall as
vacancy ticks higher
John Perry
Research Analyst
(+1) 212 250-4912
john.perry@db.com
Conor Fennerty
Research Associate
(+1) 212 250-1576
conor.fennerty@db.com
Vin Chao, CFA
Research Associate
(+1) 212 250-6799
vincent.chao@db.com
Vacancy rose 40 bp in 2Q09
In the 27 major apartment markets we track, vacancy increased 40 bp to 7.5% in
2Q (see Figure 1) as absorption increased from its lowest level since we began
tracking data in 3Q02, but remained negative for the third consecutive quarter.
There were -1,480 units of net absorption in 2Q compared to -16,931 in 1Q09 and
+5,927 in 2Q08 (see Figure 2). As a result, rent growth was -1.1% sequentially and
-2.2% YoY.
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Industry Update
Global Markets Research Company
Rents continue to fall
Rents in the top 27 metros were down 1.1% sequentially in 2Q which was largely
unchanged from the 1.2% rate of decline in 1Q. On a YoY basis, rents declined
2.2%, which was a 230 bp decrease from 0.1% in 1Q. This marks the first quarter
of negative YoY rent growth since 4Q03.
Apartment starts plummet
There were 9,796 apartment starts in 2Q, which was a significant decline from the
22,893 starts in 1Q and 20,695 in 2Q08 (Figure 7). Eight of the 27 markets that we
track had no starts while New York had the largest amount of starts (1,906 units).
Starts in the three Texas markets that we track, Austin, Dallas and Houston,
declined from 9.5k or 42% of overall starts in 1Q to 1.4k or 14% of overall starts in
2Q. We attribute the unusually high number of starts in New York to the manner in
which we track the data. Due to cancellations and delays, we do not include
properties in our starts figure until REIS assigns an estimated completion date.
California remains weak
Absorption was mixed in California during the quarter, with four of the seven
metros we track recording positive absorption. However, sequential rent growth
was negative in all seven metros and, vacancy increased sequentially in five of the
seven metros. We would attribute the decline in vacancy rates in San Jose (-40 bp)
and Oakland (-10 bp) to the seasonal up-tick and a drop in rents. San Jose had the
largest sequential rent decline, down 2.9%, and rent in Oakland (-1.7%) also fell
more than the national average (-1.1%).
Impact of condo reversions / conversions declines
Condo construction continued to decline in 2Q with 47,331 units under
construction, down substantially from a peak of 136,840 units in 4Q07. Vacancy
rates and pricing power could be impacted if converted condos revert back to
apartments or if new condo construction comes on line as apartments. However,
the estimated increase in occupancy continues to decline as total condo supply
falls. For the top 27 metros, if 30% of units were to be reverted / converted, we
estimate it would add roughly 20 bp to vacancy.