Economists' Commentary: Multi-family

With the economy still struggling through the prolonged economic recession, with consumers concerned about employment and the prospects for recovery, the multi-family sector is displaying softening, but positive fundamentals. Demand for apartments declined in the fourth quarter of 2008, closing the year at a much lower pace of net absorption than 2007. However, demand is stronger in the first quarter of 2009, at 60 million square feet. Absorption is projected to maintain a moderate, but positive pace for the rest of the year.

Reflecting deteriorating economic conditions, new completions have been slowing down over 2008, closing the year about four percent lower than 2007. Completions are expected to continue dropping another 31 percent during 2009.

The national vacancy rate is at 6.0 percent for the first quarter of 2009, down 10 basis points from the previous quarter. However, following the rise in vacancy rates over the past year, rent growth in the multi-family sector is down. For the first quarter of 2009, rents are 0.4 percent.

Regionally, markets with low vacancies are concentrated along the coasts. In fact, of the 15 markets with the lowest availability rates for the quarter, only three are in the Midwest. Incidentally, topping the list of lowest availability is Pittsburgh, PA, with a vacancy rate of 4.4 percent. It is followed by San Diego, with 4.7 percent vacancy, as well as San Jose, CA and Newark, NJ, both of which post vacancies of 4.8 percent. Washington, DC, Minneapolis, MN and Boston, MA, each have vacancy rates of 5.2 percent.

On the other side, there are a few markets that have experienced a great deal of residential construction over the past few years, which competed for consumers with the multi-family sector. The list includes Phoenix, AZ, with a vacancy rate of 10.9 percent, Jacksonville, FL (10.8%), Atlanta, GA (10.7%), Las Vegas, NV (9.8%), and Orlando, FL (9.6%).

Considering multi-family's performance during 2008 and weighing the next few months, the sector is projected to remain stable. By the end of 2009, the vacancy rate is expected to be 6.2 percent, while rent growth for the year is expected to be 1.7 percent.