Apartment Vacancies Fell in Second Quarter

The improvement allowed landlords to modestly raise rents, though big increases aren't likely until U.S. job growth accelerates.

The national apartment vacancy rate stood at 7.8% at the end of June, according to Reis Inc., a New York real-estate research firm. That was down from the 8% vacancy rate during the first quarter, which was the highest vacancy rate in 30 years. At the end of the second quarter a year ago, the vacancy rate was 7.7%.

Getty Images

The Stuyvesant Town and Peter Cooper Village apartment complexes, seen in front of the Empire State Building last October in New York City. Delivery of new apartments nationwide is expected to slow in 2010 and 2011.

Rents gained by 0.7% during the seasonally strong April-to-June period, the biggest quarterly gain in two years, led by improvements in Long Island, N.Y.; San Jose, Calif.; Boston and Seattle. Those are markets where landlords slashed rents last year as job losses prompted more renters to downsize. Not surprisingly, Washington, D.C., which has one of the strongest job markets in the nation, posted the largest 12-month rent gain of 3.1%.

In New York City, rents rose 1.4% during the second quarter even as the vacancy rate increased 0.2 percentage points, making it one of just 15 markets to see an increase in vacancies.

The numbers mean that the renters' market of the past two years, where landlords showered perks such as two or three months of free rent to entice tenants, is drawing to a close. The balance of power hasn't swung "completely back to owners right now," says Hessam Nadji, managing director at real-estate firm Marcus & Millichap. "But we're well under way to see that balance shift back."

Rents fell in just 10 of the 82 markets tracked by Reis, with the biggest declines coming in Orlando, Fla., and Baltimore. Markets with a big oversupply of vacant and foreclosed entry-level homes are expected to remain weak. Phoenix and Las Vegas posted the largest year-over-year rent declines, of 2.3% and 2.9%, respectively.

Vacancies are heavily dependent on job growth because many would-be renters typically double up or move in with family members during a downturn. The apartment sector's improvement comes as more renters who have jobs feel comfortable upgrading their living situation. "People today are more confident to say, 'I can go live in my own space and I don't have to keep hunkering down,"' says Victor Calanog, director of research for Reis.

But landlords won't be able to boost rents significantly until the job market recovers. "Until we have the real increase in jobs, we won't have the pricing power," says Jeffrey Friedman, chief executive of Associated Estates Realty Corp., which owns and operates 12,000 units in the eastern U.S.

Still, the apartment sector could benefit from some other trends. First, mortgage lending standards are much tighter today than at any point in the past decade, which should keep more renters from leaving to buy homes. That is a big change from the last downturn, when "people who couldn't qualify to rent were qualifying to buy homes," says Alexander Goldfarb, an analyst at Sandler O'Neill & Partners LP.

Second, the lack of financing for new apartment construction over the past two years has constrained the pipeline of new supply that should hit the market in the next two years. The apartment sector, which added between 100,000 and 150,000 units annually over the past decade, is on pace to deliver just 60,000 units in 2011 and 2012, according to Marcus & Millichap.

That lack of new supply is "allowing the apartment sector to do a lot better, faster than anyone in the industry anticipated," says Mr. Goldfarb.

It is unclear how long the sector will benefit from those supply constraints. The relatively healthy outlook for apartments has attracted considerable capital but apartment sales haven't picked up.