Drop in Apartment Vacancy Rates Forecast for 2010

March 19, 2010
By Barbra Murray, Contributing Editor

Courtesy Flickr Creative Commons user 00dann

Plagued by the overwhelming number of job losses across the country, the apartment market has suffered from plummeting occupancy levels. However, per CBRE Econometric Advisors’ recently updated forecast, 2010 will bring some relief.

The average U.S. apartment vacancy rate reached 7.5 percent in 2009. Rising unemployment played a major role, but a more detailed explanation for the numbers lies beyond the surface.

“When we analyze apartment markets, we tie it to jobs, but there are two drivers of demand–people being displaced by foreclosures and moving back into the rental market and the other is organic growth, people forming new households,” Gleb Nechayev, an economist with CBRE-EA, told CPE. “Now, it’s hard to quantify which contributes more; it’s murky. With foreclosures, many households end up renting single-family homes or condominiums. But we do see some cushioning effect from foreclosures in some areas; if there hadn’t been foreclosures, the impact of job losses on the apartment market would be even more serious.”

As for the creation of new households, normally, the market could rely on recent college grads and even younger adults to, quite literally, take up space, but such is not the case in the current climate.

“New household formation is one of the lowest we’ve seen in many years due to the severity of job losses we’ve had,” Nechayev said. “Younger people have one of the highest unemployment rates, so they often end up staying with their families instead. In the second half of 2010, we do expect to see more of a positive impact on apartments, but it will be very limited. It will take time for them to find jobs this year, so we don’t see that group being an overriding factor that will benefit apartments.”

While apartment owners and managers had many challenges to contend with last year, they managed to limit the damage to a certain extent, particularly as 2009 edged to a close. “With more competitive rents and concessions, the market’s been successful in keeping occupancy up and we didn’t see a decline at the end of 2009,” Nechayev noted.

According to CBRE-EA’s report, the nation’s apartment vacancy rate will drop to 6.8 percent in 2010. “The overwhelming driver now for the apartment market will be any job growth,” he said. “As the economy begins to recover and as job growth returns, we’ll see concessions begin to dissipate and that will help the market in the second part of 2010; and there will be less decline in rents.”

This year, the average rental rate is expected to decrease 2.3 percent from 2009, a notable improvement compared to 2009’s 2.9 percent decline from 2008.