PHOENIX-For the third year in a row, the U.S. economy continues sluggish growth as it remains impacted by macro factors. Despite the poor economic showing, the multifamily property sector nationally continues strong, bolstered by a net absorption of more than 30,000 units in Q2 and a national multifamily vacancy rate of 4.7%.
On the economic side, If the 1.9% GDP growth reported during Q1 2012 weren’t enough, other factors weighing in include European issues, the general election and the expiration early next year of payroll and Bush-era tax cuts. According to the Marcus & Millichap Real Estate Investment Services’ Q3 Economic and Apartment Outlook report prepared by vice president of research services John T. Chang, all of this will lead to continued problems for the economy, including a weaker consumer spending base and contraction in new factory orders. All of this, combined with an 8.2% unemployment rate encouraged the Federal Reserve to downgrade its near-term outlook for the economy.
What this means for real estate. Two interesting real estate factors point to signs of recovery in the residential sector – the report notes that sales of existing single-family homes have returned to its long-term trend of an annualized 4.6 million units in May. This resulted in a 21% decline in inventory to 6.6 months.
But the real story continues to be demand for apartments. Strong demographic trends, such as higher levels of immigration and the surge of echo boomers who are moving away from their parents, is one reason why the multifamily property sector continues so strong. Other factors include a shift away from homeownership, especially among younger people who are still grappling with college debt.
Now on to more numbers. The 4.7% vacancy rate represents a 20-basis point decline from Q1 2012 and a 120-basis point drop from Q2 2011. Effective rents increased 3.5% nationally year-over-year. Coastal and supply constrained markets did especially well, seeing double-digit rental increases.
The demand for multifamily properties, coupled with the low cost of funds and high liquidity, has led to a new construction cycle with the forecast for supply in 2012 calling for 85,000 units. This is a drastic increase from 2011′s completions of less than 40,000 units. Additionally, favorable demographic forces combined with more capital availability continue attracting investors to apartments – Q2 apartment sales volume totaled $24.8 billion, a 38.6% increase from the same time last year. The average price per unit increased by 6.6% to $101,000, which put pressure on cap rates; these fell 30 basis points to 6.2%.
The forecast? The report says the apartment market doesn’t show any signs of weakening, especially given the increase in immigration and echo boomers and millennials wanting to set up household. The forecasted completion of 85,000 units will total about half of what’s needed to accommodate anticipated demand. So it’s safe to say that vacancy will continue to drop (the Marcus & Millichap report predicts a 4.4% vacancy by year end), with tight supply closing the gap between asking and effective rents.
|Increased demand for multifamily properties combined with constrained supply has dropped nationwide vacancy to 4.7%. We could be seeing 4.4% vacancy by year end.
These markets represent the largest drop in vacancies, year-over-year. The national average drop was 120 basis points.