U.S. apartment rents increased in the first quarter at their slowest pace since late 2011 amid a wave of construction that will further test landlords’ ability to raise rates, Reis Inc. said.
Effective rents, or what tenants pay after any price breaks from owners, averaged $1,054 a month, up 0.5 percent from the fourth quarter, according to the property-research firm. Landlords’ asking rents also climbed 0.5 percent, to $1,102. It was the slowest growth for both measures in five quarters. Vacancies, which for the past year have been at the lowest level in a decade, dropped to 4.3 percent from 4.5 percent in the fourth quarter and 5 percent a year earlier.
“Given how tight vacancies have become, rent growth ought to be stronger,” Victor Calanog, chief economist of New York-based Reis, said in a report today. Sluggish job and wage growth have raised questions about how much more landlords can increase rents, he said.
More than 100,000 new apartment units are scheduled to open this year, most in the latter half, Reis said. Shares of multifamily real estate investment trusts including Equity Residential and AvalonBay Communities Inc. have fallen from a high reached in mid-2012 amid concerns that the housing recovery would hurt apartment demand and a deluge of new supply would restrict landlords’ ability to boost rents.
The concern is especially acute in metropolitan areas such as Washington, where new apartments are opening amid government spending cuts. More than 3,000 new multifamily units are scheduled to become available this year in the nation’s capital, the biggest supply increase in more than 30 years, according to Reis. Effective rents in Washington fell 0.1 percent from the prior quarter, the first decline in four years, the firm said.
Throughout the U.S., 13,706 new apartment units were completed in the first three months of 2013, up from 10,659 a year earlier, Reis said. First-quarter vacancies of 4.3 percent were the lowest since 2001’s third quarter, when the rate was 3.9 percent. Landlords had net occupancy gains of 36,216 units, down from 36,483 a year ago and 44,004 in the fourth quarter.
“The next few quarters will test the robustness of apartment fundamentals in the face of rising supply growth and rent levels that may have climbed to unsustainable levels,” Calanog said.
Some cities are better positioned to absorb a surge of multifamily construction. In Seattle, where the unemployment rate fell to 7.1 percent in January from 8.3 percent a year earlier, the owners of Via6, an apartment complex with 654 units that opened downtown in February, have signed 311 leases through yesterday, many of them with a month of free rent.
Such incentives are being re-evaluated given strong demand for the units, said Matt Griffin, managing partner of Via6’s developer, Seattle-based Pine Street Group LLC. Apartments are being leased by tenants in their 20s and 30s and by people choosing to rent after such life changes as divorce, retirement, children moving out or a spouse’s death, he said.
“When we originally put together the plan for the building, we said it would take two years to lease it up,” Griffin said in a telephone interview. “There’s a little betting going on in our office whether it’ll be closer to one.”
Velo Bike Shop has opened on Via6’s ground floor, and a restaurant, cafe and grocery store by local restaurateur Tom Douglas will open by mid-year, Griffin said.
“We would expect apartment rates over 10 years to rise at a faster rate than inflation -- maybe a point or two” higher, he said. “More important to us even than supply coming on is what happens to job growth in downtown Seattle. It clearly looks robust.”
Seattle ranked first nationwide in rent growth, with a 6.1 percent gain from a year earlier, according to Reis.