Apartment Vacancy Rate Declined in Q2

Effective Rents up 17.5% Year-over-year

Moody’s Analytics Reis reported that the apartment vacancy rate was at 4.5% in Q2 2022, down from 4.7% in Q1, and down from a pandemic peak of 5.4% in both Q1 and Q2 2021.

From Moody’s Analytics Senior Economist Lu Chen: Apartment sets new record, Office continued its bumpy ride, and Retail stayed flat

We started the 2nd quarter of the year with lowered COVID restrictions but persistent price increases and hawkish Federal Reserve monetary policies, all while under the backdrop of many geopolitical and economic uncertainties. Despite these challenges, the multifamily market posted another quarter of record growth.  Vacancy decline accelerated from the 1st quarter and was down another 20 basis-point (bps) to a five-year low at 4.5%.  On a year-over-year basis, vacancy dropped by a cumulative 90 bps, the steepest annual decline over the past two decades.  While new construction continued to be sluggish, demand has remained strong  with a net absorption rate hovering above 30,000 units. Even though affordability has eroded due to the rapid increase of average rent and only modest growth in median household income across the United States, multifamily demand was supported by strong Gen Z household formation, and would-be first-time home buyers who have been priced out of the entry level housing market due to a 21% overvaluation of single-family home price in general, and a 17.2% price appreciation in the most affordable [1] This steady multifamily demand and tight supply translated into  2.7% and 2.8% increase in asking and effective rent on a quarter-over-quarter basis, which puts the year-to-date asking/effective rent growth to 5.2% and 5.4% respectively.  Factoring in the rapid recovery back in Q3 2021, and asking and effective rent have grown 16.7% and 17.5% over the past 12 months, setting a new year-over-year record in our more than 20 years of tracking national level trends.

This graph shows the apartment vacancy rate starting in 1980. (Annual rate before 1999, quarterly starting in 1999).  Note: Moody’s Analytics is just for large cities.

Moody’s Analytics also reported the effective rents were up 2.8% in Q2 from Q1, and up 17.5% year-over-year. Last week, I posted a graph of the year-over-year change for various measures of rent. The Zillow measure is up 15.9% YoY in May, down from 16.6% YoY in April. This is down from a peak of 17.2% YoY in February. The ApartmentList measure is up 14.1% YoY as of June, down from 15.4% in May. This is down from the peak of 17.8% YoY last December.

Reis’ survey (dashed red) is quarterly and shows a similar increase in effective rents

Last year, rents jumped from Q2 to Q3, so the year-over-year change will probably decline sharply in the next report.

Effective rents declined significantly in the early stages of the pandemic, and even with the recent surge in rents, effective rents are up 6.1%% annualized over the last 2 1/2 years. So, a significant portion of the rent increase over the last year was making up for the previous declines.

Completions and Net Absorption

With the release of the May Housing Starts report, I noted there were the most housing multi-family housing units under construction since 1974

Currently there are 843 thousand multi-family units under construction.  This is the highest level since April 1974!

This is that same story for the Reis data for completions and absorptions. For the large cities that Reis tracks, apartment completions were way below normal, and absorption was about two-thirds of normal, so there was a mismatch in demand and supply (due to construction delays), and that pushed down the vacancy rate and pushed up rents.

The completion of all these units under construction should help with rent pressure. See: Housing Completions will Increase Sharply in 2022

Apartment vacancy data courtesy of Moody's Analytics.