Calvin Schnure

Apartment markets remain tight across the country. Vacancy rates ticked up 10 bps, from continued new construction as well as some slowing in absorption, but are still at rock-bottom levels. Rent growth accelerated to a 6% annual rate, as vacancy rates in the low 4’s indicate little or no slack in the market, giving landlords a strong position to increase rents.

The multifamily REIT sector has been on a hot streak the past few years, as record-high occupancy rates and solid rent growth have lifted net operating income and property valuations to new highs. The strong tailwinds for this sector stem in large part from the significant pent-up demand, or “shadow households”, currently doubled-up with roommates or parents.

Household formation has been stubbornly slow in recovering from the housing crisis. Recent data show, however, that a recovery is underway (finally)!

Nonfarm payroll employment rose only 142,000 in September, far below recent trends, and gains in prior months were revised down as well. There’s little good news in this report concerning the economic outlook, as there was no gain in average hourly earnings, and labor force participation slipped further, indicating that weak demand for labor is keeping some potential workers on the sidelines.

The Federal Open Market Committee (FOMC) declined to raise short-term interest rates at its September policy meeting, citing concerns about the potential impact of weaker global growth and financial market turmoil on U.S. economic conditions. It is clear, however, that the days are numbered before the FOMC embarks on the path to higher interest rates; the latest decision merely delays the inevitable. What, then, is the likely impact on the REIT sector of eventual shift to higher interest rates?

The apartment sector enjoys solid demand in the face of moderate increases in supply of new units. This has kept vacancy rates extremely low—4.2% for two quarters running, which indicates little (if any) excess supply. Rent growth perked up again in Q2, to a 4.7% annual rate. 

Prices of commercial real estate are rising rapidly, spurred in part by an influx of foreign money. As a result, cap rates have declined to historically low levels. Have prices risen too rapidly? What are the risks of a sharp correction in the months and quarters ahead, especially as the Federal Reserve contemplates an increase in short-term interest rates?

The demand for rental housing shows no signs of letting up. Data through mid-year show that the rental market continues to tighten despite increasing new supply, as the national rental vacancy rate fell to 6.8%, the first time it has been below 7% since 1985.

Tracing the building momentum in the commercial real estate market.

At each phase of their lives, the Baby Boom generation has had a major impact on American society. The hula hoops and bell bottoms are long gone, and the next major issue will be how the Baby Boomers retire. 

If good things come in threes, then the housing market is right on track—and that’s good news for REITs and commercial real estate, too. Sales of new homes, sales of existing homes and house prices are all on an uptrend. New home sales increased 2.2% in May and are nearly 20% above a year earlier.