Vacancy Rate Illustrates
Trouble for Apartments

The apartment market ended 2003 with the highest vacancy rate in 15 years and only a small increase in rent prices, a sign that the sector still is a ways off from any significant, broad recovery.

The average vacancy rate for the 50 biggest metropolitan markets in the U.S. rose to 6.9% in the fourth quarter, up from 6.6% in the third quarter and 6.3% at the end of 2002. The 2003 rate is the highest since 1988, when it was 7.2%, according to Reis Inc., a New York real-estate research concern.

So-called absorption of apartments, which is an indicator of the industry's health, turned negative in the fourth quarter after two straight quarters of positive absorption, hardly surprising given that October, November and December typically are slow leasing months.

Negative absorption occurs when the number of apartments vacated in any given period exceeds the number rented; positive absorption is when the number of rentals exceeds those vacated. Still, for the full year absorption was positive, totaling 30,864 units, marking the first time that indicator was positive on an annual basis since 2000.

Meanwhile, effective rents, which are rents landlords actually collect as opposed to what they hoped to collect, rose to $859 a month, from $857 in the third quarter and $857 at the end of 2002. Reis bases its rent figures on a blended average of studios and one-, two- and three-bedroom apartments.

The apartment market has been plagued by a weak job market; low mortgage rates, which have wooed would-be renters into buying houses instead; and too much construction in some markets since the economy turned downward during late 2000. At the very least, analysts say, 2003 was better than 2002 and 2001. Last year "was certainly not a recovery year [for the apartment sector], but it does appear to have been the end of continuing declines," said G. Ronald Witten, president of Witten Advisors LLC, a Dallas apartment-market advisory firm.

The technology-wrecked San Francisco Bay area, encompassing San Francisco, Oakland and San Jose, for example, posted a 4.2% drop in asking rents in 2003, compared with an 8.2% slide in 2002, according to Reis.

"The rent losses were not as extreme as they were before," said Man King Fong, a senior analyst at Reis. To be sure, many landlords still are offering concessions, such as a month's free rent or waived security deposits, just not as heavily.

Marvin R. Banks Jr., chief financial officer of Gables Residential, a Boca Raton, Fla., apartment real-estate investment trust that owns about 22,800 apartments in Atlanta; south Florida; the Texas cities of Austin, Dallas and Houston; and Washington D.C., said the REIT saw slowdowns in the amount of tenant turnover and rent declines in its portfolio.

Job growth in most of Gables' markets was a big factor. Atlanta's employment growth rate increased 3.1% for the 12 months ended November, compared with a decrease of 0.2% on average nationwide, according to Economy.com, a West Chester, Pa., research firm. South Florida's job growth rate climbed 1.5% during that time, while Austin and Washington, D.C., experienced expansion of 0.89% and 1%, respectively, according to Economy.com. Houston and Dallas continued to lose jobs but not more than they did during the same period in 2002. Economy.com expects all of those markets to report employment growth in 2004, predicting 1.2% job growth for the U.S.

Though a few markets began to stabilize in 2003, the market overall still isn't out of the woods. Reis raised its 2004 vacancy forecast to 7.1% from a previous forecast of 7%. Mr. Witten said he doesn't see "any meaningful recovery on a U.S. basis" until the latter part of 2004.

Email your comments to rjeditor@dowjones.com.