October 6, 2011 / 4:05 AM / 6 years ago

US apartment vacancy rate down in 3rd qtr, rent up

5 Min Read

* Q3 vacancy falls to lowest level in more than 5 years

* Q3 rent up 0.7 percent over Q2

* Q3 rent increases 2.4 pct year over year

By Ilaina Jonas

Oct 6 (Reuters) - Americans continued to shun home ownership in the third quarter and construction remained tight, fueling rent increases and pushing the average apartment vacancy rate to its lowest level in more than five years, according to real estate research firm Reis Inc.

The third-quarter U.S. vacancy rate dropped to 5.6 percent from 5.9 percent in the second quarter, approaching its lowest level since mid-2006, when vacancy hit 5.5 percent, Reis said in a report released on Thursday.

The U.S. apartment market has been one of the two best performing sectors of commercial real estate over the past year, helped by the move away from home ownership and by job growth among young people who were confident enough to move out of their parents' homes or ditch their roommates, the report said. Hotels have been the other top performing segment.

The average asking rent climbed 0.6 percent to $1,059 per month. Factoring out months of free rent and other perks landlords offer to lure tenants, effective rent rose 0.7 percent to $1,004 a month, according to Reis. Effective rent was 2.4 percent higher than a year ago, growing more robustly than asking rent, which was up 2.1 percent, and indicating that landlords no longer felt as compelled to offer perks.

During the third quarter, increasing rents were pervasive, with 81 of the 82 markets that Reis tracks posting higher effective rents. Only Las Vegas bucked the trend, posting flat rent.

"Multifamily has really good fundamentals," Reid Liffmann, managing director of alternative investment advisor Angelo Gordon & Co, said on Wednesday, speaking at the iGlobal Forum Real Estate Private Equity Summit in New York.

"There's a lot of reasons why multifamily is working well," he said, citing the move away from home ownership. "We have bought multifamily selectively," he said.

The trend is expected to help apartment owners such as Equity Residential (EQR.N), AvalonBay Communities Inc (AVB.N) and UDR Inc (UDR.N).

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New construction remained constrained as only 8,183 units came to market, the second-lowest level since Reis began tracking the apartment market in 1999. The lowest was in this year's first quarter.

"With continued tightness in new supply in 2011, we expect vacancies to continue to decline throughout the remainder of the year as households favor the rental market," Reis senior economist Ryan Severino said in a statement.

New interest in apartment construction will not translate into livable units until late next year, he said.

Still, some investors are wary that apartment building prices may have gone too far and the sector in some markets eventually will fall victim to overzealous developers.

"There will be select markets, as in past history, that will get overbuilt quicker than expected," Liffmann said.

But in the land-constrained market of New York City, the largest U.S. apartment market, the vacancy rate edged lower to 2.6 percent in the third quarter from 2.7 in the second quarter, Reis said. The slight drop in vacancy was enough to trigger a surge in rents, up 1.2 percent in the third quarter to $2,859 a month.

Although it pales in size compared with New York, New Haven, Connecticut, remained the tightest market at 1.9 percent, buoyed by a large student population, including from Yale University. New Haven's average rent rose 1 percent over the second quarter to $1,101 per month. (Reporting by Ilaina Jonas; Editing by Gary Hill)

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