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Is There a Slowdown in the Apartment Market?

Map illustrating the boundaries of the ten regions defined by HUD and their included states.Although some data suggest that the multifamily rental market is cooling, several regions continued to experience moderate to considerable growth through the fourth quarter of 2015.

A recent article in the Wall Street Journal posed the question of whether the national apartment market is cooling down. After years of high demand for rental housing, recent data suggest that supply may have finally caught up. The article notes that, according to Reis, the national vacancy rate increased to 4.5 percent in the first quarter of 2016, up for the third straight quarter after reaching a low of 4.2 percent in the second quarter of 2015. Rising vacancy rates suggest that the supply of apartments is catching up to or outpacing demand, potentially leading to a slower rise in rents. A rising vacancy rate may please renters, but the prospect of dwindling profits may dissuade developers from building multifamily properties. Although the article presents a compelling narrative about a potential production cool down in the multifamily market, it may not tell the whole story about the multifamily market nationwide.

The Reis vacancy rate takes into account the housing markets of only 20 large U.S. cities. As a result, this figure may not truly explain how apartment markets are faring across the whole country. As highlighted in the March 2016 National Housing Market Summary, the most recent report released by HUD, data from the U.S. Census Bureau show that the multifamily vacancy rate was 7.0 percent in the fourth quarter of 2015, down from 7.9 percent in the third quarter and 7.7 percent in the fourth quarter of 2014. In other words, the multifamily market nationally was tighter in the latest quarter, which potentially could help spur further development. Multifamily construction activity in the fourth quarter, as measured by number of units permitted, grew by 15.4 percent from the same period in 2014. If the apartment market were indeed cooling right now, we should begin to see this growth rate slow to levels much lower than 17 percent, the average quarterly year-over-year growth rate since the beginning of 2013.

These national figures paint an incomplete picture, however; multifamily construction activity varies across the country, as one would expect. The fourth quarter of 2015 saw a year-over-year increase in multifamily building activity, as measured by number of units permitted, in 7 of the 10 HUD regions. The New England region, for example, experienced year-over-year growth in multifamily activity of 54 percent in the fourth quarter, following 33 percent growth in the third quarter. This fourth-quarter increase was greater than that of every other HUD region except for New York/New Jersey, which was disproportionately affected by an expiring tax incentive for multifamily development in New York City.

Like the New England and New York/New Jersey regions, the Great Plains and Midwest regions saw considerable year-over-year growth in multifamily activity, while the Southeast, Southwest, and Mid-Atlantic regions had modest growth. The 50 percent growth in multifamily permits in the Great Plains region was driven largely by development in the St. Louis and Kansas City areas of Missouri and the Des Moines-West Des Moines area of Iowa. The Midwest region experienced 33 percent growth in multifamily units permitted “in response to continued tightening in the metropolitan apartment markets.” So, even though some data may suggest that the multifamily market is cooling, this doesn’t appear to be evident in every region across the country.

Nevertheless, some regions did experience a slowdown in multifamily activity in the fourth quarter. Permits in the Rocky Mountain region, for example, were down 18 percent from peak activity in the fourth quarter of 2014. The Pacific region saw multifamily activity fall 13 percent in the fourth quarter after a significant increase in activity in 2014 resulted in higher vacancy rates, and a 6 percent decline in multifamily activity in the Northwest was the first decrease in fourth-quarter permits since 2009. These declines seem to support the theory that apartment markets are cooling down. However, multifamily development continues in the metropolitan areas of these regions, where demand for rental housing remains strong.

Although some evidence exists that multifamily production may soon slow after the rapid growth of the past 6 years, a slowdown does not necessarily mean that the market is turning toward declines in production. Rather, this slowdown may be the multifamily market correcting itself after a period of tremendous expansion in the aftermath of the housing bubble. We may be seeing more normalized levels of production, but demand for rental housing persists. Thus, builders will build, as the growth in multifamily activity in most of HUD’s regions illustrates. Despite this growth, many researchers still expect the boom in apartment supply and demand to begin to fade as household formation picks up and renters move from the rental market into homeownership. Whether this transition is happening as quickly as the Wall Street Journal article suggests, however, remains unclear.