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New High -End Units Have Become Harder to Fill,
<br />But Low -Rent Units Remain in High Demand
<br />Share of Neer Units Rented Larcent9
<br />100 — _. .........................................---
<br />98
<br />96
<br />94
<br />92
<br />90
<br />8s
<br />88
<br />84
<br />82
<br />8o
<br />Less than $850 $850-1,249 $1,258-1,849 $1,650-2,449 $2,450 or Moro
<br />Monthly Asking Rent
<br />Year 212015 02016
<br />Nota: The annual absorption rate covers privately financed non-subsidizad, unfurnished rental apartments in
<br />buildings m1h five or more units complaint in the previous year,
<br />Souse', JCls tabulations of US Census Bureau, Survey of Market Absarnian.
<br />But there are signs that conditions are loosening. According to the
<br />US Census Bureau, the vacancy rate in multifamily buildings with 5
<br />or more units rose 0.9 percentage point in the third quarter from a
<br />year earlier, to 8.5 percent, indicating some easing in that segment.
<br />RealPage also reports that the apartment vacancy rate rose by a
<br />full percentage point in the year ending in the third quarter, with
<br />increases in 95 of the 100 metro areas tracked.
<br />Underlying this shift is growing softness at the high end of the mar-
<br />ket. In the Class A segment where rents average $1,700 per month,
<br />the vacancy rate hovered near 6.0 percent in the first three quarters
<br />of 2017upfrom around 4.5 percent a year earlier. This is the high-
<br />est vacancy rate reported since 2011, and the highest rate for any
<br />property class.
<br />Newly constructed high-end apartment properties became more dif-
<br />ficult to fill last year. According to the Survey of Market Absorption,
<br />10 percent of rentals completed in 2015 and priced at more than
<br />$2,450 remained vacant after 12 months. In contrast, only 2 percent
<br />of units with rents below $1,250 were still unfilled within one year
<br />(Figure 27). Apartment absorption rates fell most in the principal cities
<br />of metro areas, where most new supply has come online. In con-
<br />trast, absorption rates were up in suburban and non -metro markets,
<br />where fewer new rentals have been added.
<br />Demand for mid -market (Class B) rentals, which rent for $1,180 a
<br />month on average, has also begun to ease. The vacancy rate in this
<br />segment ticked up by a full percentage point to 4.6 percent in the
<br />third quarter of 2017. While the rate remains relatively low, this
<br />increase indicates that softness in the high-end market is beginning
<br />to affect mid -market conditions. Nearly 90 of the 100 apartment
<br />markets tracked by RealPage reported a year -over -year increase in
<br />Class B vacancies in the third quarter.
<br />Meanwhile, the vacancy rate in the lowest -cost segment of the pro-
<br />fessionally managed market (Class C) was down to just 3.3 percent
<br />in the second quarter of this year—its lowest reading since 2001—
<br />before jumping back up to 4.1 percent in the third quarter. Despite
<br />this uptick, Class C vacancy rates were at or below 3.0 percent in
<br />nearly half (46) of the 100 metros tracked by RealPage.
<br />With rents for Class C units about a third lower than the market
<br />average, tightness in this segment indicates both ongoing demand
<br />for modestly priced rentals as well as a persistent shortfall in supply.
<br />Broader measures of vacancy rates that include all rentals confirm
<br />these conditions. For example, 2016 American Community Survey
<br />data show that vacancy rates for less expensive units (with contract
<br />rents below the area median) were below those for more expensive
<br />units in 42 of the nation's 50 largest metros. Indeed, 14 large metros
<br />reported rates in the lower-cost segment at or below 5.0 percent last
<br />year, compared with just 3 metros in 2006. The tightest conditions
<br />were in Los Angeles, Portland, San Francisco, and Seattle, where
<br />vacancy rates for low-cost rentals were under 3.0 percent.
<br />Tlght conditions are also evident in certain rental structure types
<br />tracked by the Housing Vacancy Survey. For example, vacancy
<br />rates in buildings with 2-4 units—which tend to be older and less
<br />expensive—held at 7.0 percent in the third quarter of 2017. Rates for
<br />single-family rentals, however, declined to 6.2 percent in response to
<br />strong demand and limited inventory.
<br />RENTS STILL UNDER PRESSURE
<br />The CPI index for rent of primary residence, which covers the broad-
<br />est range of rental property types, was up 3.9 percent in the year
<br />ending September 2017. Although only a modest gain from the
<br />previous year, this increase is still noteworthy because it marks yet
<br />another year when housing costs have risen faster than the prices of
<br />non -housing goods (Figure 22). Rent increases were highest in the West
<br />(5.5 percent) and South (3.5 percent), held steady in the Midwest (at
<br />2.9 percent), and slowed somewhat in the Northeast (from 2.9 per-
<br />cent to 2.6 percent).
<br />According to RealPage, the year -over -year increase in nominal rents
<br />for professionally managed apartments was 2.7 percent in the
<br />third quarter of 2017, continuing the slowdown from 4.0 percent a
<br />year earlier and 5.6 percent two years earlier. However, trends vary
<br />widely across apartment property types. At one extreme, a flood of
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