Markets

Apartment Vacancies Drop to 3 Year Low, as Rents Rise - Apartment REITs Benefit

April 8, 2011

2 minute read

Lost in the tragedy that is the U.S. housing market (ex Washington D.C. and Manhattan), is a potential boom time in the rental market. With modest building of new units, and a flood of new renters (many of which were home owners over the past 5 years), we do seem to have the perfect storm brewing. Homeownership rates - which bubbled to nearly 70% at the peak of the mania are STILL above the long-term average by a few percentage points.

In stock market terms, the obvious play here are the apartment REITs - however, I think the market has sniffed this out well in advance as the stocks of names such as Equity Residential (EQR), Essex Property (ESS) and AvalonBay Communities (AVB) have been in a steady trend up, with little relent.

Via Bloomberg:

U.S. apartment vacancies dropped to the lowest in almost three years in the first quarter as the weak homebuying market fueled demand in what is usually a slow period for rentals. The vacancy rate declined to 6.2 percent from 8 percent a year earlier and 6.6 percent in the fourth quarter of 2010, the New York-based research firm said in a report today. The rate was the lowest since it reached 6.1 percent in the second quarter of 2008.
Unemployment of close to 9 percent and a surge in home foreclosures have pushed many people to rent, driving a rebound in multifamily properties during the past year. Construction of apartments has climbed from a 50-year low on expectations that rents will increase and more people will seek to lease.
“There is a bias against homeownership at this point, especially if you feel home prices won’t rise and you can wait,” Victor Calanog, chief economist at Reis. “Most of the applications for construction and building loans are for multifamily buildings.”
Effective rents, or what tenants actually pay, increased in 75 of the 82 markets Reis tracks, to an average $991 a month from $967 a year earlier and $986 in the fourth quarter.
Landlords’ asking rents also climbed, to $1,047 from $1,027 a year earlier and $1,043 in the previous quarter, according to the report.
Home ownership in the U.S. dropped from a peak of 69.2 percent in 2004 to 66.5 percent at the end of 2010, with each percentage point representing about 1.1 million households, according to the Census Bureau.
Developers have stepped up rental projects in anticipation of rising demand. AvalonBay Communities Inc. (AVB), the second-biggest publicly traded U.S. apartment owner, started 11 developments in 2010 with a combined 2,446 apartment units.