PHOENIX—Apartment deliveries may have increased nearly 50% in 2014, but supply still lags demand nationally and the vacancy rate will decline further through at least the end of 2016. Even so, the influx of new product will fuel competition for renters. Those are among the key takeaways from Berkadia's 2015 Forecast Book, provided exclusively to GlobeSt.com in advance of wider distribution.

In the coming year, following delivery of 240,000 units across the US in '14, multifamily construction will ramp up to 300,000 rental units, followed by a projected 340,000 apartments coming on line in '16. That's compared with an average of 185,000 units per year since the depths of the recession.

Even so, “the uptick in completions will slow but not stop vacancy decreases,” writes David Delich, the Phoenix-based multifamily investment advisory firm's director of research. For one thing, the post-recession average of 185,000 units compares to 320,000 per year prior to the downturn, meaning a shortfall of 945,000 units through the end of this year.

The vacancy rate nationwide receded 60 basis points to 5% in 2014, the lowest point since 2000. A year from now, Berkadia predicts, nationwide vacancy will fall 40 bps further to 4.6%, and will decline to 4.3% by the end of '16. Over the next two years, the Salt Lake City and Inland Empire markets are anticipated to turn in healthy performances with vacancy below the U.S. rate and triple-digit basis-point declines,” just as Baton Rouge, Las Vegas, St. Louis, Colorado Springs and Orlando all posted vacancy drops of 100 bps or more over the past year.

Even as an increase in inventory isn't expected to lift vacancies over the next two years, “the new supply will bolster competition for renters,” Delich writes. Accordingly, concessions will expand to 2.9% of asking rents by the end of '16, equivalent to an additional seven days of free rent.

In the coming year, asking rents will advance 4.2% to $1,220 per month, while effective rents are predicted to ascend 3.3% to $1,197 per month. For '16, the asking and effective rent increases are projected at 4.1% and 3%, respectively, to $1,270 and $1,233 per month.

Dollar volume on multifamily properties of 100 units or more, and trading at $1 million or better, rose 14% over the past year, fueled by a combination of widespread investor interest and aggressive lending, writes Delich. He adds that competition for multifamily assets suppressed nationwide cap rates 40 bps to 5.5% in 2014, while the average price per unit rose 7.1% to $105,400.

Over the past year, overall initial yields declined by 30 bps to 5.3% for class A properties, and 20 bps to 6.6% for class B and C acquisitions. The quality of the properties aside, the fastest yield compression occurred in secondary markets due to “spill-over investment demand from primary metros,” Delich writes, with cap rates also tightening by 30 bps to 6.2%.

Although price appreciation was pronounced in the primary metros, rising an average of 9.1% to $226,100 per unit over the past 12 months, it was most evident in tertiary metros. There, the average price per unit rose 10.8% to $75,000 per unit, a product of increased activity by opportunistic investors.

The Berkadia report spells out overall trends among the various asset classes and market sizes, yet its 60 individual metro area snapshots also illustrate the differences among these cities in terms of fundamentals and investment opportunities. Even in a generally rising economy, Delich tells GlobeSt.com, buyers need to pay as much attention to the dynamics of each individual market as they ever have.

“With so much competition for apartment investments, top-performing investors will certainly continue to closely monitor each metro's distinct supply-side pressure and employment-driven demand,” he says. “These buyers will weigh micro level operational factors like supply, rent-growth potential and renter demographic profiles against macro factors such as interest rates, inflation and the spectrum of both short- and long-term capital markets options.” For more information, click here to visit the Berkadia website.