The Mortgage Corner
After hitting bottom in 2010, Reis Reports, a leading rental property analyst, reported in Q1, “After five quarters of improvement, it is apparent that we are in the midst of a recovery in the office sector”, said the report. “National asking and effective rent growth improved slightly in the first quarter, continuing the slow upward trend that began in the first quarter of 2011. Annual gains of 1.6 and 2.1 percent, respectively, also indicate a moderate pace of improvement, but are unimpressive.”
The sector continues to be hampered by the anemic pace of improvement in the labor market. There is certainly positive churn in leasing, but rents remain at levels last seen in 2007, and five-year leases coming due in 2012 run the risk of being signed at equivalent or lower rent levels, exerting a dilutive effect on landlord incomes.”
Office Effective Rent Growth
Graph: Reis Reports
Apartment Vacancy and Rent
Apartment leasing was more favorable, with the national vacancy rate now below 5 percent. Activity showed little signs of slowing during the first quarter, partly because of the relatively mild winter in the Northeast, said Reis. Net absorption, or the net change in occupied stock, remains strong with 36,488 units leasing up. Tight supply conditions with only 7,342 apartment units coming online in the first quarter are helping the performance of apartment properties around the nation. National asking and effective rents remain strong, with effective rents (asking rents net of concessions) increasing at its fastest rate since end-2007. Asking rents grew by 0.5 percent and effective increased by 0.9 percent in the first quarter. Reis expects effective rent growth to accelerate even more as vacancies tighten within the 4 percent band; with availability so scarce, landlords have little incentive to concessions.
Graph: Reis Reports
Neighborhood and Community Shopping Center Effective Rent Growth
Asking and effective rents both increased by 0.1 percent, in line with the changes from the fourth quarter of 2011. This is the second consecutive quarter of rent increases and another cautiously optimistic sign for neighborhood and community centers. Additionally, relative to the first quarter of 2011, both asking and effective rents grew 0.2 percent. This represents a slight acceleration versus the fourth quarter when year-over-year asking and effective rents were either unchanged or marginally negative. These data points offer more, but still insufficient, evidence of a nascent recovery.
But, “We remain cautious about pronouncing a turnaround until we observe a couple more quarters of improvement,” said Reis. “As we have observed in the recent past, two consecutive quarters of improvement are not necessarily the beginning of a trend and are insufficient to declare that a recovery is underway.”
Graph: Reis Reports
So it seems apartment leasing and construction is leading the real estate recovery, as builders are still reluctant to start much new single family construction. Econoday reports that optimism continues for the apartment industry, according to the latest results of the National Multi Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions. The findings reflect a gradual recovery for the multifamily sector that faced a 50-year low in apartment starts in 2009.
Graph: Econoday
"Market conditions improved across the board, even from the rather strong level of three months ago,” said NMHC Chief Economist Mark Obrinsky. “Demand for apartment residences – and apartment properties – continues to grow. We anticipate this increasing further in the coming years due in part to the large number of younger households moving into the housing market and a greater preference shown for renting.”
The Market Tightness Index increased to 74 from 60. Nearly half (49 percent) reported tighter markets – reflecting lower vacancy rates and/or higher rents – compared to only one percent reporting looser markets.
Harlan Green © 2012
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