The recovery in the multifamily sector is hitting on all cylinders with rents rising, vacancies falling, and accelerating construction, while the single-family market is still on a slow path of revival.
The multifamily sector is “going to do a lot better than the single-family market over the next five years,” said IHS Global Insight economist Patrick Newport.
“The trend is still away from homeownership,” Newport told ASR sister publication National Mortgage News. “You still have a lot of foreclosures in the pipeline and people who lose their homes will mostly end up renting.”
High demand for apartments has pushed the vacancy rate on multifamily units down to 4.2% in the third quarter from 5.6% a year ago, according to the National Association of Realtors (NAR).
At the same time, increases in rental rates have nearly doubled from 2.2% in 2011 to 4.1% in 2012. “Sharply higher demand for apartments is causing rents to rise at faster rates,” NAR chief economist Lawrence Yun said.
The Realtors are forecasting that rents will jump another 4.4% in 2013.
Multifamily builders completed just 37,700 units in 2011. NAR estimates completions will hit 79,850 units by the end of this year, and 148,600 in 2013. The 20-year average for multifamily completions is 237,000 units per year.
During the first six months of this year, multifamily starts were running at an annualized rate of over 220,000 units on average, according to Kim Betancount at Fannie Mae.
Based on recent trends, multifamily starts “could return to its historic norm of an annualized rate of approximately 245,000 units started as early as the end of this year,” said Fannie’s director of economics and multifamily research.
PNC Financial Services researchers expect multifamily completions to run about 75,000 units in 2012, 190,000 units in 2013 and 240,000 units in 2014. But this increase in completions will have a moderating effect on rents, according to Aimee Baumiller, a researcher at PNC Real Estate. And she thinks tenants are becoming “price sensitive” as landlords continue to push up prices.
“We see rent growth easing slightly in 2012, with annual rates close to 3% – moving to more modest levels in 2013 and 2014 as more supply is delivered to the market” she said. So far, overbuilding does seem to be a concern.
“There is a potential for oversupply occurring over the next 24 months in a limited number of submarkets, which the industry continues to monitor,” Betancourt said in a recent report.