The U.S. apartment-vacancy rate rose for the first time in almost five years, a sign that supply is starting to catch up to rental demand after a boom in multifamily construction.
The vacancy rate rose to 4.2 percent in the third quarter from 4.1 percent the previous three months, the first increase since the end of 2009, Reis Inc. said in a report. Net leasing gains of 37,233 units lagged behind the 46,055 new units completed, the New York-based real estate research firm said.
The completions were the second-most since 2002 as developers build more rentals to capitalize on demand sparked by the foreclosure crisis and younger Americans moving out on their own. The increase in vacancies from the lowest level in more than a decade is an “inflection point” in the apartment market, said Ryan Severino, senior economist at Reis.
“We have passed peak occupancy and with the new construction coming on, occupancy is likely to decline going forward,” he said in a telephone interview.
Apartment developers are poised to finish building the most units this year since 1999, when the economy was booming, Severino said. With construction outpacing the net total of units likely to be leased over the next four years, “we expect the national vacancy rate to slowly drift upward,” he said.
So far this year, 113,024 apartment units have been built in the U.S., exceeding the 85,438 units completed through nine months of 2013, according to Reis.
Thirteen of the 79 largest U.S. markets had a vacancy rate of less than 3 percent in the third quarter, down from 16 in the prior three months, Reis data show. The national vacancy rate is still below where it was a year ago, at 4.3 percent.
Rents rose, partly because new units charge higher-than-average prices, Reis said. Effective rents, or what tenants pay after any landlord price breaks such as a free month, climbed 3.4 percent from a year earlier to an average $1,111 per month, and were little changed from $1,100 in the second quarter, according to Reis. Rents are at record highs on a nominal basis, according to the researcher.
San Francisco and San Jose, California, had the largest growth in effective rents year over year, at 6.4 percent and 5.9 percent, respectively, according to Reis. Seattle was third with 5.7 percent growth.
Denver had the biggest jump in effective rents from the second quarter, at 1.9 percent, or almost double the national gain of 1 percent. Austin, Texas, was second, with a 1.7 percent increase, according to Reis.
The national apartment-vacancy rate is likely to remain at less than 5 percent through 2018 as demand continues from younger adults and lackluster income growth prevents landlords from raising rents more, Severino said.