Smaller Markets Favor Apartment Landlords in 2016.Q1

Economic performance for the first quarter of 2016 was upwardly revised this past week by the Bureau of Economic Analysis. Real gross domestic product (GDP) advanced 0.8 percent on an annual basis, up from the initial estimate of 0.5 percent.

Payrolls rose at a solid pace, adding 609,000 net new jobs. Average weekly earnings of private employees rose by 2.1 percent in the first quarter of this year, compared to one year earlier. The unemployment rate averaged 4.9 percent in the first quarter 2016. The average duration of unemployment declined from 31 weeks in the first quarter of 2015 to 29 weeks in the first quarter of this year.

The labor force participation (LFP) rate rose slightly as more Americans returned to the labor markets, but continued to hover at historic lows.  The LFP rate was 62.8 percent in the first quarter of 2015, slid to 62.5 percent in the third and fourth quarters, and rose to 62.9 percent in the first quarter of 2016. In comparison, before the Great Recession the LFP rate was 65.9 percent.

Consumer confidence, as measured by The Conference Board, was unchanged at 96.0 in the first quarter of 2015, compared with the prior quarter. Separately, the Consumer sentiment index compiled by the University of Michigan moved up slightly in the first quarter of the year to 91.6, compared with the 91.3 value from the fourth quarter. Both remain lower on a year-over-year basis.

With improving employment prospects and a return to labor markets, household formation has returned to its long-term trend. Historically, 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. During 2015, household formation advanced at a rather moderate pace of 191,000 new households. So far, 2016 is off to a slow start, as the first quarter’s data recorded a 306,000 decline in net household formation.

net hh

Demand for multifamily properties softened during the quarter, but remained on an upward trajectory. Renter occupied housing units totaled 42.9 million units in the first quarter of 2015, a 363,000 unit advance from the first quarter of 2015, based on U.S. Census Bureau data. National vacancy rates averaged 7.0 percent for rental housing during the first quarter, 10 basis points lower than the same period in 2015. Median rents for rental units averaged $870 in the first quarter of this year.

Commercial fundamentals in smaller markets continued improving during the first quarter of 2016, but at a slower pace. Leasing volume during the quarter rose 1.3 percent over the prior quarter. Leasing rates advanced at a slower pace as well, rising 1.9 percent in the first quarter, compared with the 2.5 percent advance recorded during the fourth quarter. As rising new supply loosens major markets, apartments in SCRE markets experienced availability decreases, with the national average declining 61 basis points year-over-year, to 7.2 percent in the first quarter of 2016. Average apartment rents for the first quarter were $785 per unit.

cre vacancy forecast


Access the Commercial Real Estate Outlook: 2016.Q2 report here.

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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