U.S. apartment vacancies fell to a five-year low in the third quarter, enabling landlords to increase rents even as tepid job growth slowed leasing in what is usually a strong season for demand, Reis Inc. said.
The vacancy rate dropped to 5.6 percent, the lowest since the third quarter of 2006, the New York-based property-research company said in a report today. It was 5.9 percent in the previous three months and 7.1 percent a year earlier. The average monthly effective rent rose to $1,004 from $997 in the second quarter and $981 in the same period of 2010.
Mounting foreclosures, tighter credit for homebuyers and young people moving out on their own have increased demand for apartments after the vacancy rate reached a three-decade high of 8 percent at the end of 2009. Leasing may be starting to cool as the U.S. unemployment rate sticks above 9 percent and concern grows that the economy is weakening, Reis said.
Apartment demand in the third quarter “was good, but maybe not as good as it could have been,” Ryan Severino, senior economist at Reis, said in a telephone interview. “Sentiment turned severely negative during August and there was a heightened fear of the economy backsliding.”
Landlords saw a net increase in occupied space of about 36,000 units in the third quarter, fewer than the 42,000 units in the previous three months and 95,000 units a year earlier, Reis said. The period is usually one of the strongest for apartment leasing because people tend to move during warmer-weather months and school vacations.
Renewed weakness in the labor market slowed a wave of young people moving out of their parents’ homes or leaving roommates to rent their own place, a phenomenon known as unbundling, said Donald Davidoff, head of marketing for Archstone, the apartment owner based in Englewood, Colorado. The U.S. economy added zero jobs in August, the weakest reading since September 2010, and the unemployment rate remained at 9.1 percent, according to the Labor Department.
“The fact that job growth has slowed is certainly not encouraging additional unbundling,” said Davidoff, whose company owns 434 apartment complexes across the U.S. “The pace of that has clearly slowed over the past couple of months.”
Vacancies shrank partly because new completions remain near their lowest since Reis began tracking the quarterly data in 1999, Severino said. About 8,200 units came to market in the past three months, the second-lowest quarterly number of the past 12 years, according to Reis. New supply from developers could start affecting occupancy rates in late 2012, Reis said.
Effective rents, or what tenants pay after landlord giveaways are included, rose on a year-over-year basis in 81 out of the 82 metropolitan areas tracked by Reis. San Jose, California, led with 5.5 percent growth in effective rents from a year earlier, followed by San Francisco at 4.5 percent and New York at 3.7 percent, Reis said. Las Vegas was the only city where rents fell.
The 2.3 percent annual growth nationwide in effective rents outstripped the 2.1 percent annual increase in landlords’ asking rents, suggesting that concessions continued to decrease amid strong demand for rental housing, Reis said.
Vacancies should decline further as the number of jobs increases for people ages 20 to 34, the prime group of renters, said Severino. Lingering pessimism about home prices and the difficulty of qualifying for mortgages also favor the rental market, he said.
“The market hasn’t quite tightened to the point where landlords can really push rents in excess of inflation,” Severino said. “But we’re not too far away. We can envision within the next year or so seeing a figure more in the 3 to 4 percent range” for rent growth.
Effective rents have climbed 4.1 percent from their recession low in 2009, according to Reis. Higher rates may spur people to double up again, move home or downsize to a less expensive rental, according to Ron Johnsey, president of Axiometrics Inc., a Dallas-based apartment-research company. Rent growth is “definitely flattening out,” he said.
“The operators really pushed rents the first half of the year and then just stood there to protect those gains,” Johnsey said. “It looks like that may be happening again.”
William Kendust, a 26-year-old church youth director in the city of Melbourne on Florida’s eastern shore, moved back in with his parents in January after sharing an apartment with his brother and a friend for two years.
“I just felt that it would be throwing money away to rent a place before I was ready” to buy a house, said Kendust, who plans to stay at home longer to help his mom after his father died unexpectedly.
“A lot of young people in their 20s want to be able to get up and go, and the opportunity of going back to school is a draw,” Kendust said. “Living with their parents for a while gives them the freedom to do that.”