Spotlight on PD&R Data | PD&R Edge

Apartment Market Conditions

According to the U.S. Census Bureau, the national rental vacancy rate was 7.3 percent in the third quarter of 2015; however, apartment market conditions vary from very tight to slightly soft across HUD’s 10 regions.

Researchers and policymakers have noted that rents are rising rapidly in many areas of the country, which has triggered an affordable housing crisis in certain regions and metropolitan areas. Although broader macroeconomic factors are driving up rents, another way to gain insight into this development is to look specifically at apartment market conditions across the country.

One of the main statistics to observe in apartment markets is the vacancy rate and how it affects market conditions and trends in rental prices. According to the U.S. Census Bureau, the national rental vacancy rate, which reflects the rental vacancy rate for single-family homes, condominiums, and cooperatives as well as apartments, was 7.3 percent in the third quarter of 2015. For single-family rentals, the vacancy rate was 7.1 percent, and the vacancy rate for multifamily rentals (5+ units) was 7.9 percent. As noted in the December 2015 National Housing Market Summary, these rates have declined from the third quarter of 2014 (7.3% for single-family rentals and 8.0% for multifamily rentals), suggesting tighter conditions for rental markets nationwide.

Tight housing markets go hand in hand with lower vacancy rates for rental housing such as apartments. In a tight apartment market, the demand for apartments exceeds the supply of available units, which lowers vacancy rates. When these prospective renters compete for the limited supply of available apartments, rents increase.

When the apartment market is tight, developers, attracted by the high demand and rising rents, build more apartments. Ideally, this activity would result in a balanced market in which demand equals supply. However, because of a number of issues with housing and real estate markets (such as zoning regulations, the amount of available developable land, and construction lags), this equilibrium may not be easily met. As a result, we see a range of apartment market conditions in the United States, from very tight to slightly soft.

In the third quarter of 2015, HUD’s Region 10: Northwest had one of the nation’s tightest apartment rental markets. Strong demand compared with supply led to a year-over-year decrease in the vacancy rate in nearly every metropolitan area in the region. As a result, average monthly rents in the region rose in every metropolitan area, led by Portland’s year-over-year increase of 13 percent and Seattle’s annual increase of 10 percent. Observers are concerned that the region’s rapidly rising rents — particularly in Seattle and Portland — will reduce housing affordability for both current and potential residents. In Region 9: Pacific, tight apartment markets in the San Francisco Bay Area, including the San Francisco-Oakland-Hayward and San Jose-Sunnyvale-Santa Clara metropolitan statistical areas, have led to year-over-year increases in average monthly rents of 16 and 11 percent, respectively.

Although cities such as San Francisco, Portland, and Seattle attract attention for their tight apartment markets and rising rents, many cities and regions in the United States have apartment markets that are balanced to soft. For example, metropolitan areas in Region 6: Southwest had mostly balanced apartment markets in the third quarter of 2015. In this region, San Antonio’s apartment conditions were slightly soft as the vacancy rate in the area increased to 9.4 percent from 8.7 percent the year before. Moreover, despite high demand in the region, cities such as Dallas and Houston had balanced market conditions because of their willingness to rapidly build more homes, increasing their supply of apartments to keep pace with demand. Nevertheless, rents in these two cities still increased 8 percent year over year even in a balanced market, suggesting that the correlation between apartment market conditions and rents is not perfect.

Renters and owners have different perspectives on the relationship between apartment market conditions and rental prices. Prospective renters want softer apartment markets and a rising vacancy rate, which lead to lower rents. Owners and developers, on the other hand, prefer to see tight markets, which boost their rental income. As previously mentioned, in a perfectly competitive market these conflicting forces would eventually lead to an equilibrium in rental prices, but this does not always happen. In some areas, it takes time for market forces to even get close to a balanced market. Nevertheless, many analysts suspect that the national vacancy rate for apartments will increase in the coming quarters and years as current properties under construction are completed and enter the market, which would ease the housing affordability crisis.