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Market Dynamics provides an examination of key influences on apartment industry performance. You’ll value the perspectives and insights from the MPF Research team, including Greg Willett, an industry expert widely known for his knowledge and expertise in the field. View Market Dynamics online or Sign Up for e-mail delivery as new issues are posted.

U.S. Apartment Occupancy Gets a Quarterly Bump, But Rents Fall Further
October 6, 2009
by Greg Willett

Preliminary results from MPF Research's 3rd quarter survey of apartment sector fundamentals across the country's 64 largest markets show no real surprises. Following the pattern seen in the first half of the year, demand continues to register at levels stronger than normally would occur in a period of substantial job loss. Thus, occupancy is moving toward stabilization, actually improving a bit on a quarterly basis. But that occupancy result reflects that apartment owners and operators are buying demand, lowering rents to better position traditional apartments relative to the shadow market stock of individually-owned condos and single-family homes offered for lease.

Starting with the good news, apartment absorption proved solidly in positive territory during 3rd quarter. MPF Research's early estimate is that demand registered at roughly 70,000 units, taking total absorption during the first nine months of the year to around 125,000 apartments. While net move-outs are routine during 4th quarter, results seen so far in 2009 place the country on a pace to absorb some 75,000 to 100,000 units for the calendar year, quite a comeback from the net move-outs tallied at approximately 170,000 units during calendar 2008.

On net, virtually all of this demand is being captured by top-tier product, primarily recent completions moving through the initial lease-up process. Resident loss continues in the middle of the market and at the bottom end, though net move-outs in those sectors are slowing from the levels seen in late 2008 and early 2009.

Demand realized during 3rd quarter was strong enough to boost occupancy by 0.3 points from the mid-year result, according to preliminary figures. That quarterly bump places the U.S. apartment occupancy rate at 92.2 percent. While the fall 2009 occupancy rate trails the year-earlier showing by 1.6 points, all of that annual loss actually occurred during 2008's 4th quarter.

Metro-level occupancy leaders as of September are the usual suspects: the Bay Area markets, Boston, the New York and Northern New Jersey region, Pittsburgh and San Diego. Bottom-tier occupancy performers continue to include places like Phoenix, Las Vegas and Atlanta. The two mega-markets in Texas — Houston and Dallas — now are recording some fairly notable deterioration, as job losses are starting to mount in these latecomers to recession at the same time that lots of new supply continues to pour on stream.

The bad news remained focused on rent performances during 3rd quarter. Measuring change on a same-store basis, effective rents that take into account the impact of concessions were off 4.1 percent in the preliminary calculations for the year-ending September. Whereas all the annual loss in occupancy occurred during late 2008, the annual rent cuts primarily reflect prices slashed during 2009, with another round of sizable reductions occurring specifically during 3rd quarter.

We're down to just a handful of metros posting even the slightest rent growth during the past year, with that list including Pittsburgh, Norfolk, El Paso and Columbus. (Louisville, Oklahoma City and Albuquerque probably make the grade as well, but their survey samples still need a little clean up.) In contrast, effective rents are off about 13 percent from year-ago levels in New York and by 10 to 11 percent in San Jose and Seattle. Metros recording rent losses of roughly 7 to 9 percent include Austin, Greenville, Las Vegas, Los Angeles, Oakland, Orange County, Phoenix, Sacramento, Salt Lake City and San Francisco.

Considering losses in both occupancy and rents since the start of the recession at the end of 2007, revenues for U.S. apartments have dropped about 7 percent so far. That figure should get to between 8 and 9 percent by the time we reach the end of 2009 and probably will near 11 percent by the time apartment market fundamentals bottom during 2010.

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