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Apartment Performance Slowed in Q3

10/05/2012 | By Carisa Chappell

Apartment Performance Slowed in Q3

The apartment sector has lost some of the momentum that it showed earlier in the year, according to a recent third-quarter report from Reis Inc., while the office and retail sectors remained sluggish.

"We are starting to see the first indications of a bit of fatigue in the apartment market," said Ryan Severino, senior economist with Reis. "We're not seeing the vacancy compression that we once saw."

The national vacancy rate inched down from 4.7 percent to 4.6 percent, the slowest rate of improvement since the recovery began in early 2010, according to the report.

Landlords appear to have shifted their revenue-maximizing strategy from improving occupancies to raising rents. Some wonder, however, how long landlords can sustain that trend.  The weak labor market is affecting the apartment sector, Severino said, as job creation has not been nearly as strong as in past recoveries and has been concentrated in lower-wage occupations.

Severino called particular attention to the plight of the 20 to34 year olds, the prime drivers of apartment demand.  Low wage growth is limiting how much higher rents they can pay. Rent growth slowed a bit to 0.9 percent last quarter from 1.3 percent in the spring. He noted that such a slowing in the summertime was unusual as the second and third quarters are typically the strongest seasons for apartments.

In terms of commercial real estate overall, Severino said the changes in the third quarter sector trend report were a little less pronounced than they were in the second quarter.

"We're really not seeing a robust pace of improvement. While certainly there has been a little slow down for the major property types, it's not as if it were a breakneck pace in the second quarter," he said.

The sluggish job market is also impacting the office sector. Absorption was positive for the seventh consecutive quarter, but remains extremely low relative to historical norms. Office vacancy rates declined from 17.2 percent to percent to 17.1 percent in the third quarter largely because new construction is also low. Rent growth was tepid.

Severino said that the central business district (CBD) areas are still outperforming the suburban areas, and that the office markets that are performing the best are ones with a strong concentration in segments of the economy that are outperforming.

"Eight of the top ten markets in terms of year-over-year growth of effective rent are either in the technology or energy sectors," he said. "There's a stark contrast in the kind of rent growth that those markets are generating."

The outlook for the remainder of the year is modest at best in terms of office space. Many organizations are unwilling to make decisions about hiring and business plans due to the European debt crisis, elections and uncertainty over the positional fiscal cliff looming, according to the report.

 The retail sector stalled in the third quarter after having shown some modest improvement earlier in the year.  Regional and super regional malls outperformed the neighborhood and community center based shopping centers, Severino said, which he attributes to the mall sector being more stable.

"You don't really see the big supply boom and bust in the mall sub sector the way you do in neighborhood and community sectors," he said, adding that only one regional mall has been delivered in the United States in the last six years.

Severino explained that the Class A malls that cater to affluent consumers and have luxury type retailers are significantly outperforming other malls. Neighborhood and community shopping centers are also getting by, especially those with discount stores, grocery store anchors and other shops selling non-discretionary products. Retailers in the middle, however, have been hollowed out and are struggling.