Apartment Sector Enjoys
Small 2nd-Quarter Gains

Conditions in the nation's apartment market improved slightly in the second quarter, but the unusually large number of newly constructed apartments expected to hit the market in the next six months threatens to slow the sector's recovery.

The average vacancy rate in the nation's top 61 metro markets fell to 6.8% in the second quarter, down from 7.1% in the first quarter, according to Reis Inc., a real-estate research firm based in New York. The second quarter's vacancy rate was still up, however, from 6.6% in the year-earlier second quarter.

Absorption, an indicator of the industry's health, turned positive in the second quarter, meaning the number of apartments rented during the quarter exceeded the number vacated. Absorption totaled 36,869 units in the second quarter, swinging from a negative 17,830 units in the first quarter. Absorption was 32,651 units in the year-earlier second quarter. The second quarter is typically a strong leasing quarter, as weather turns warmer.

Despite the uptick in absorption for the quarter, Reis sees challenges ahead amid the brisk pace of apartment construction. Indeed, Reis cited construction as one reason it expects the vacancy rate to rise to 7.1% by the end of the year, the highest level since 1986, when it was 7.9%. Reis expects 100,000 new units this year, less than the 110,745 last year, but still a lot, considering last year's supply hasn't been fully absorbed.

Effective rents -- what landlords actually collect as opposed to what they hoped to collect -- rose to $868 a month in the second quarter from $862 a month in the first quarter and $857 in the year-earlier quarter. Markets with the biggest jumps in rent growth year over year included Norfolk, Va. (7.8%), Miami (3.2%), Las Vegas (1.4%), New York (4.2%) and suburban Virginia (3%). Reis bases its rent figures on a blended average of studios and one-, two- and three-bedroom apartments.

Since late 2000, the apartment market has been hard hit by a combination of factors, including the weak job market, low mortgage rates that have wooed would-be renters into buying houses instead, and an excess of construction in some markets. The new results from Reis showing slight improvement indicate that while the sector benefited to some degree from strong employment growth, particularly in March, April and May, it still has a few more quarters to go before a true recovery can be said to ha ve taken hold.

The second quarter, said Ric Campo, chief executive of Camden Property Trust, a Houston apartment real-estate investment trust, "was a setting of the stage for a recovery sometime in the third or fourth quarter or the beginning of next year."

Michael Cohen, a real-estate economist with research firm Property & Portfolio Research Inc., based in Boston, said the average vacancy rate and rent levels in the 54 markets the firm tracks appeared to stabilize in the second quarter. But he expressed concerns about the number of apartments planned for construction. The three-month rolling average of multifamily units entering the planning phase as of April totaled 80,000 units, according to the firm, compared with 40,000 units a year earlier.

"You can have a recovery, but if builders take an improving economy and increasing demand by tenants for units as a positive sign to build apartments, it could eat through the increase in demand and delay the recovery," he said.

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