U.S. Apartment Vacancies Climb as New Buildings Crowd the Market

  • Empty units at recently built complexes push vacancies to 4.4%
  • Leasing new projects takes `a lot longer,' Reis economist says

U.S. apartment vacancies rose in the fourth quarter as a construction surge in pricier urban locations overshadowed rising demand for older properties in the suburbs, Reis Inc. said.

The national vacancy rate averaged 4.4 percent in the three months through December, up from 4.3 percent a year earlier and in the third quarter, the New York-based research company said Tuesday. Vacancies rose from the previous three months for a second straight quarter -- the first time that’s happened since 2009.

Vacancies remain close to their lowest in more than a decade, with rising demand for older apartments in suburban locations keeping the national rate down. The surge in apartment construction since the recession has been largely confined to Class A properties, typically buildings close to city centers aimed at high-income professionals.

“It’s taking a lot longer for new projects to lease up,” Ryan Severino, a senior economist at Reis, said in a phone interview. “Vacancies are rising predominantly because a lot of shiny, sexy new Class A projects are having a harder time leasing up relative to a few years ago.”

Reis has recorded zero completions of new Class B and C apartments since 2012, following the addition of about 44,000 units from 2007 to 2011. Developers have delivered almost 1 million new Class A units since the beginning of 2007, according to the firm.

Class Difference

At Class B and C properties combined, vacancies dropped to 3.2 percent in the third quarter of 2015, having fallen steadily from 4.3 percent in three years, while Class A vacancies climbed to 5.7 percent from 4.6 percent during the same period. Reis plans to announce the fourth-quarter breakdown later this month. Apartment vacancies nationally have been hovering near their lowest since 2001 for the past three years.

Relatively low total vacancies are “masking some significant differences in class,” Severino said. “Class B and C vacancy continues to fall with every subsequent quarter. Class A vacancy bottomed out in the first quarter of 2013 and it’s been slowly rising since then.”

‘Recession-Proof’

Some big investors have been exploiting the gap, buying and renovating Class B apartment buildings across the country. Blackstone Group LP, the world’s biggest private equity firm, has invested about $14 billion in older apartments in the past three years, while Starwood Capital Group in October agreed to pay $5.4 billion for a group of mostly suburban buildings in areas including South Florida and Denver. The seller is Equity Residential, the biggest U.S. apartment landlord.

“They’ve swarmed over the apartment space, particularly the Class B workforce space,” said Robert Hart, chief executive officer of TruAmerica Multifamily, a Los Angeles-based investment firm that he founded in 2013 with Guardian Life Insurance Co. of America. “It has the most durable cash flow. It’s the most recession-proof and it’s not as susceptible to increases in supply.”

TruAmerica acquired about $1.8 billion of apartment buildings last year, Hart said. About three-quarters of those are Class B properties, which the company has been buying for a capitalization rate of about 5.5 percent, according to Hart. Class B apartment buildings typically offer a cap rate -- a measure of investment yield used in real estate -- about 1 percentage point higher than Class A properties, which are typically less than a decade old, he said.

More Renters

Americans occupied about 42.6 million rental-housing units, including single-family homes, as of the third quarter of last year, an increase of almost 9 million households since 2005 and the largest gain in any 10-year period on record, according to the latest biennial report on U.S. rental housing by the Joint Center for Housing Studies at Harvard University. The share of U.S. households that rent rose to 37 percent, the highest level since the mid-1960s, from 31 percent a decade ago.

Apartment rents rose 0.8 percent in the fourth quarter from the third, with asking rents averaging $1,229 a month, and effective rents -- payments after any discounts, such as a free month -- averaging $1,179, Reis said. While the increase “was a bit slower than the scorching performance during the last two quarters,” it “still represents an annualized rate in excess of 3 percent, well ahead of even core inflation,” Severino said in the report.

“Eventually, rising vacancy rates will take the wind out of landlords’ sails and remove some of their ability to keep pushing rent growth at such a febrile pace,” he said.

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