Household Formation Slowdown Impacts Apartment Demand in 2015.Q4

Economic performance for the fourth quarter of 2015 was upwardly revised this past week by the Bureau of Economic Analysis. Real gross domestic product (GDP) advanced 1.0 percent on an annual basis, up from the initial estimate of 0.7 percent.

Payroll employment rose at the strongest pace in the last stretch of the year, adding 837,000 new jobs. The figure closed the year with a total net gain of 2.7 million employees. Average weekly earnings of private employees rose by 2.4 percent in the fourth quarter of this year, compared to one year earlier.

The unemployment rate declined from 5.6 percent in the first quarter 2015 to 5.0 percent by the close of the year. At the end of December there were 7.9 million unemployed Americans.  The average duration of unemployment declined from 31 weeks in the first quarter to 28 weeks by the end of 2015.

Consumer confidence, as measured by The Conference Board, declined to 96.0 in the fourth quarter of 2015, the lowest reading of the year. Separately, the Consumer sentiment index compiled by the University of Michigan moved up slightly in the last quarter of the year to 91.3, compared with the 90.7 value from the third quarter. The second quarter value was 94.2 while the third quarter posted 90.7.

Consumers’ wobbling confidence translated into lower household formation figures. Looking at historical trends, household formation averaged 1.3 million every year over the 1958-2007 period. Between 2008 and 2013, the average number of new households dropped to 579,000 per year, underscoring the severity of the Great Recession and ensuing slow recovery. In 2014, net household formation jumped to 2.2 million, as employment growth encouraged more young people to strike it on their own. During 2015, household formation advanced at a rather moderate pace of 191,000 new households.


Demand for multifamily properties continued on an upward path. Renter occupied housing units totaled 42.6 million units in the fourth quarter of 2015, a 300,000 unit advance from the fourth quarter of 2014, based on U.S. Census Bureau data. National vacancy rates averaged 7.0 percent for rental housing during the fourth quarter, unchanged from the same period in 2014. Median rents for rental units averaged $850 in the fourth quarter of this year.

Commercial fundamentals in smaller markets continued improving during the fourth quarter of 2015. Leasing volume during the quarter rose 3.0 percent compared with the third quarter of 2015. Leasing rates advanced at a steady pace, rising 2.5 percent in the fourth quarter, compared with the 2.5 percent advance in the previous quarter. As rising new supply is a concern in major markets, apartments in SCRE markets experienced availability decreases, with the national average declining 63 basis points, to 6.2 percent in the fourth quarter of 2015.

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To access the Commercial Real Estate Outlook: 2016.Q1 report visit

George Ratiu, Director, Quantitative and Commercial Research

George Ratiu, Research Economist, writes regular economic columns and conducts research in the areas of commercial real estate, international investments, mortgage performance and foreclosures. He produces NAR’s Commercial Real Estate Outlook and manages quantitative surveys, including the Commercial Real Estate Quarterly Market Survey.

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