NEW YORK CITY—Since the end of the recession, vacancy rates in multifamily housing have been dropping and rents increasing at a brisk pace across the country. While that is not surprising, what is unexpected is that this trend continued through one of the worst winters on record. Arctic chills and huge snow falls in the Northeast and Midwest, colder and wetter weather in the South and droughts in the West, seem to have had little to no effect on the strength of the market for apartments.
Since 2009, the vacancy rates across the country have shrunk from 8% to 4% in the first quarter of 2014, which is remarkable considering the slow growth in jobs and the continued high unemployment. This is even more impressive in light of the fact that the vacancy rate in the fourth quarter of 2013 was 4.2%, so the winter did not put a chill on the housing market. In fact, Reis Inc. reported recently that rents increased by 3.2% in the first quarter of 2014, which resulted in 71 of 79 markets in the US having an effective growth in rents. This strength in the rental market is attributable, in part, to the dearth of residential development during the recession, the growing population, and the sudden dramatic increase in the cost of purchasing houses and apartments due also to the lack of financing during the recession. In many markets, the cost of purchasing a home has risen by 20% in the last year.
In New York City, the rising cost of housing and the sudden increase in the number of offering plans to convert buildings from rentals to condominiums has broken records at the Attorney General's Office, where the Plans are reviewed, in a process that takes more than a year. Although this is not surprising in New York City where the vacancy rate is never more than 2%, this is being repeated in cities across the country from Boston, to New Haven to Philadelphia, Chicago, Dallas, Houston, and especially in California. Some of the tightest housing markets are in the high tech areas which have been a source of jobs for young college grads and young adults starting families.
Of course, real estate and especially housing has always been directly affected by the laws of supply and demand, so the increased demand and the constraints in supply would have this kind of affect, but the strength of the market while job growth is anemic, makes the first quarter's numbers all the more impressive. Moreover, because the growth in the first quarter reflects a period when people were not inclined to fight the elements, one must assume that this growth is likely to continue. Although the supply pipeline is not beginning to reflect the pent up demand, since job growth has not demonstrated the kind of growth one expect to see at this point in the recovery, one has to also assume that when the recovery really takes off, the multifamily housing in the supply chain will be inadequate. One would expect that in the not to distant future, the stock prices for REITs that specialize in housing will also take off.
Stuart Saft is a partner at Holland & Knight LLP. The views expressed in this column are the author's own.
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