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Report: Apartment Vacancy Spiking

The nation’s multifamily vacancy rate shot up in the second quarter to an estimated 5.1%, 110 basis points higher than a year ago, according to preliminary survey results published this month by Torto Wheaton Research. The Boston-based research subsidiary of CB Richard Ellis will revise its conclusions with further data in August, but a researcher says vacancies are clearly climbing quicker than expected in many cities.

“Even with subsequent revisions, a number of markets will see vacancy rate increases of over 100 basis points compared to a year ago,” says Gleb Nechayev, Torto Wheaton’s senior economist, who authored the Multi-Housing Vacancy Index Flash report published July 18. Torto Wheaton uses data collected by Carrollton, Texas-based RealPage Inc., which provides nationwide market data through its M/PF YieldStar service.

Torto Wheaton’s report is based on initial survey responses, which in some markets include only a little more than half of the survey responses expected to come in, so Nechayev cautions against placing too much emphasis on vacancy numbers for specific markets. In general, however, it’s safe to say that the climbing apartment vacancy rates that appeared in the first quarter have accelerated in the second quarter, and earlier forecasts for the industry will need to be revised.

“We were projecting this increase would occur sometime in the next quarter, with vacancy reaching about 5.1% by the end of the fourth quarter,” Nechayev says. “We’re projecting this to increase through the first half of next year and remain elevated through the rest of 2008.”

Based on preliminary findings, Nechayev says the national vacancy rate could climb as high as 5.5% to 6% in 2008 before flattening out. That’s enough to slow rent growth, but not high enough to push rents down in most markets, he says. “Rental growth pretty much flattens out at around 3% to 5% [in 2008],” he says.

Even Florida should be able to maintain existing rental rates, but spiking vacancy rates will keep any rent growth flat to low, Nechayev says. “Virtually every market in Florida is seeing over a 100 basis point increase in vacancy over the previous year, and that continued from the first quarter, so it’s clearly a trend.”

Real estate research firm Property & Portfolio Research has also noticed softening multifamily fundamentals in a number of markets, although not to an alarming degree on a national basis. Areas that experienced high volumes of residential condominium construction and conversion, particularly on a speculative basis, are suffering the most from weakened fundamentals, according to Michael Cohen, a research strategist at PPR’s Boston headquarters.

“That would include markets in Florida, places like Orlando and West Palm Beach, and we are seeing fundamentals soften a bit in Las Vegas, Phoenix, San Diego,” Cohen says. He declines to discuss specific market statistics before releasing the company’s second-quarter report early next week.

Based on the 54 U.S. markets PPR tracks, however, national multifamily vacancy rates are flat or up slightly. “So we do agree that fundamentals have softened in a number of markets, and that is putting some upward pressure on vacancies and downward pressure on rents.”

PPR’s research doesn’t suggest painfully high vacancy rates in the near future, but Cohen points out that the multifamily market has only come down from its last down cycle by less than 200 basis points. Vacancies previously peaked at 7.4% in early 2004.

PPR is projecting more modest rent growth nationwide this year, with strong rent growth in cities where for-sale housing is expensive and demand for rental units is strong, including New York. At the same time, San Francisco, San Jose, Seattle and other markets with good exposure to information technologies will experience strong rent growth this year as well, he says.

What’s pushing up vacancies? Nechayev says weak job growth is beginning to dampen demand for rental units, but he places the lion’s share of blame at the feet of overbuilt condominiums and single-family residential properties. Many individual investors who purchased homes or condos in the boom with the intent of selling for a profit later are now unable to find buyers, and are now renting those units out as a way to cope with debt service costs.

“The chickens are coming home to roost,” Nechayev says. “Those investor units are really contributing to this up-tick in vacancy.”

It’s difficult to gauge how much rental “shadow space” is competing with professionally managed multifamily properties, but the cause and effect is suggested by the specific markets suffering the greatest increases in vacancy, namely, the markets that saw the most speculative residential building. Vacancy was up 454 basis points year over year to 8.4% in West Palm Beach, Fla., for example, while Orlando’s vacancy rate climbed 335 basis points to 5.8% in the second quarter. That compares with more stable rental markets like New York, which had 5.4% vacancy in the second quarter, down slightly from 5.5% a year earlier, according to the report.

Developers continue to add apartments, with a 40% increase in construction starts from May to June, according to McGraw-Hill Construction, a division of The McGraw-Hill Cos. Seven multifamily projects valued at more than $100 million each launched in June alone.

“On a broad level, multifamily housing has weakened considerably so far in 2007,” Robert A. Murray, vice president of economic affairs for McGraw-Hill Construction, stated in the company’s July 25 market report. “But there are still instances such as June that are reminiscent of the booming condo market present during 2005 and the first half of 2006.”

Torto Wheaton will update its second quarter analysis and market projections in early August.

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