U.S. Apartment Vacancies Decline to a Decade Low, Rents Climb

U.S. apartment vacancies dropped to a 10-year low in the fourth quarter, allowing for rent increases that are likely to continue this year, Reis Inc. said.

The vacancy rate fell to 5.2 percent, the lowest since the end of 2001, the New York-based property research firm said in a report today. It was 5.6 percent in the previous three months and 6.6 percent a year earlier. The average monthly effective rent, or what tenants paid after landlord giveaways, climbed 2.3 percent from a year earlier to $1,009, Reis said.

Rising foreclosures and stricter mortgage-lending standards have helped make rental housing the best-performing segment of commercial real estate for the past two years. The vacancy rate has fallen for seven straight quarters from a three-decade high of 8 percent at the end of 2009, according to Reis.

“With the strong occupancy we had this year, we were really able to push rents,” said Lori Mason Curran, director of real estate investment strategy for the property arm of Seattle-based Vulcan Inc., which owns more than 500 units in the city that are more than 97 percent leased.

Hiring by local employers including Amazon.com Inc. and Microsoft Corp. drove tenant demand, enabling Vulcan to increase leasing fees 6 percent to 8 percent in 2011, Mason Curran said. Seattle’s average effective rent rose 2.7 percent in the fourth quarter from a year earlier, according to Reis.

‘Optimistic’ Landlord

Vulcan was started by Paul Allen, the billionaire co-founder of Microsoft. It is preparing to break ground on almost 500 units in Seattle this quarter, Mason Curran said.

“We’re pretty optimistic about the apartment market,” she said in a telephone interview. Seattle’s rents may climb 5 percent to 7 percent this year, according to Mason Curran.

U.S. landlords’ asking rents rose to $1,064 from $1,043 on average a year earlier and $1,059 in the previous three months, according to the Reis report. Effective rents were little changed from the third quarter’s $1,004.

“The implicit demand for rental units will remain high as long as the for-sale housing market remains on the ropes,” Victor Calanog, head of research and economics for Reis, said in the report.

Rent growth may stall starting next year as a wave of new apartment development brings new projects to the market, Calanog said. Multifamily construction is rebounding from a 50-year low reached in 2009, according to U.S. Census Bureau figures.

New Construction

“The sector is benefiting from some of the lowest figures for new construction on record,” Calanog said. “By 2013, the influx of new units may begin eroding any benefit the sector derives from tight supply conditions.”

A total of 8,865 new units became available in the fourth quarter, the second-fewest for any three-month period in Reis records dating to 1999. The first quarter of 2011 had the fewest units, at 7,473.

For all of 2011, 37,678 units were completed, the lowest annual total in 31 years of Reis data. The previous record was 49,303 in 1993 during the savings and loan crisis.

Landlords saw a net gain in occupied space of 50,559 units in the fourth quarter, down from 58,238 units a year earlier and up from 36,818 units in the previous three months.

“The fourth quarter tends to be a weaker leasing period, given that most households make moving decisions in the second and third quarters, but the apartment sector exceeded expectations once again,” Calanog said.

Lowest Vacancies

New Haven, Connecticut, home to Yale University, had the nation’s lowest vacancy rate, followed by New York; Minneapolis; Portland, Oregon; and San Jose, California, according to Reis.

Effective rents rose the most for the year in San Francisco and San Jose, which have had a resurgence in hiring by technology companies. Chattanooga, Tennessee; Austin, Texas; and New York followed.

“The fact that New York City does not top the list either in terms of tightest vacancies or the strongest rent growth reflects how one of the largest rental markets in the U.S. has been buffeted by economic headwinds,” Calanog said. With job cuts by financial firms during the second half and the nation’s highest average effective rent, $2,876, “even New York landlords are finding it difficult to raise rents further,” he said.