Apartment vacancy rate hits 23-year high: report

NEW YORK Tue Oct 6, 2009 8:30am EDT

A sign at an apartment building in Los Angeles advertising a two-bedroom apartment for rent is pictured March 19, 2008. REUTERS/Fred Prouser

A sign at an apartment building in Los Angeles advertising a two-bedroom apartment for rent is pictured March 19, 2008.

Credit: Reuters/Fred Prouser

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NEW YORK (Reuters) - The U.S. apartment market in the third quarter turned in one of its weakest performances ever as the national vacancy rate hit a 23-year high despite being propped up by landlords willing to take lower rent to keep tenants, according to real estate research firm Reis Inc.

The U.S. apartment vacancy rate rose to 7.8 percent in the third quarter, its highest since 1986, according to the report released on Tuesday. Vacancies have been rising since the third quarter of 2007, according to Reis.

The U.S. apartment market has been reeling for more than a year as its main demand driver, job growth, disappeared in the U.S. recession.

Loans on apartment buildings have led the real estate industry in defaults with hotels a close second. These types of properties have short leases and downturns show up quickly.

But the tough times for both sectors do not bode well for the rest of the commercial real estate industry, where longer leases can mask falling market rents.

"It makes me wonder whether the avalanche is on its way for office and retail (real estate) unless things change really quickly and really drastically," Victor Calanog, Reis director of research, said.

Reis still expects the U.S. apartment vacancy rate to pass the 8 percent mark by perhaps next quarter but certainly by next year, Calanog said. That would make it the highest vacancy rate since Reis began tracking the market in 1980.

In the third quarter, the U.S. apartment asking rental rate fell 0.5 percent to $1,035 per month, the fourth consecutive declining quarter. Factoring in months of free rent and other perks landlords have been using to lure or keep tenants, effective rent fell 0.3 percent to $972, also the fourth consecutive quarter of declining rent.

"We have not seen that before," Calanog said.

"Vacancy could be worse if landlords didn't realize fairly early on that this end game was not going to end well and lowered rents really quickly," he said.

Reis does not foresee a turnaround in the apartment market until at least the second quarter of 2010 at the earliest.

"That turnaround may be very tepid," he said. "It might just be that vacancies are flat."

Complicating the problem is the ongoing supply of new buildings. Reis expects more than 100,000 units to come to the rental market through 2009. Of that, 73,000 units have already come online in the first three quarters of the year and were on average 42 percent vacant.

In New York, the largest U.S. apartment market, the vacancy rate fell 0.10 percentage points to 2.9 percent. Effective rent fell 0.9 percent to $2,657 per month.

"With job markets still being lost at the national level and with New York being relatively more dependent on the still-embattled financial services sector, it may take a few more quarters before we see rents bottoming out in the Big Apple," Calanog cautioned.

Some of the worst markets, such as those in South Florida and California, saw significant rent declines but they did not register effective rent declines of over 2 percent as they did in the second quarter.

(Editing by Gary Hill)

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