Strong Condominium Market Weakens Rental Demand

Low interest rates and rising home prices have propelled condominium sales to record levels nationally. But the condominium market’s strength has come at the expense of the rental housing industry, which has sagged as tenants have jumped on the home ownership ladder.

Starts of for sale multi-housing units inched up slightly in the third quarter, but starts of affordable rental units continued to drift downward, according to the National Association of Home Builders’ (NAHB’s) Multifamily Market Index (MMI). The index component gauging for-sale (condominium) starts increased from 53.44 in the second quarter to 53.47 in the third, continuing a trend that began in the first quarter of last year. The gauge of affordable rental units, by contrast, fell to 38.82 from 42.86 in the second quarter, while the starts index for market-rate apartments remained virtually unchanged at 39.81.

“Condominium sales have exceeded everyone’s expectations over the past year and production of new units hasn’t kept pace with consumer demand,” NAHB Chief Economists David Seiders said. “Meanwhile, apartment demand has been hurt by a weak job market and low interest rates that have drawn some current and prospective renters into homeownership,” he added, “but an improving economy should set the stage for greater strength down the road.”

The NAHB index also indicated continued weakness in demand for rental apartments, as the component tracing calls from prospective renters fell from 49 in the second quarter to 38, while the index of effective rents dropped from 47.97 to 41.73. The percentage of apartments rented within the last 90 days also slipped from 67.7 percent in the second quarter to 57.9 percent in the third.

Despite those negative indicators, builders and property managers remain relatively optimistic about the prospects for reducing vacancy rates in market-rental apartments going forward. The index value for expected occupancy over the next six months was 50 for Class A apartments – nearly 15 points higher than the index reported for current conditions.