Apartment Demand Ebbs as 'Avalanche' of New Units Open

By Diana Olick, CNBC Correspondent

NEW YORK (CNBC) -- One of the biggest upsides to the downturn in housing has been a surge in demand for apartments.

Whether burned by foreclosure or afraid of losing money in homeownership, Americans have run in droves to rent. That resulted in a strong rise in rents and a big drop in vacancies over the past few years, as investors rushed to build more supply. Now, just as that supply is about to come on line, demand appears to be weakening.

Apartment vacancies fell by just ten basis points in the third quarter of 2012, from 4.7% to 4.6%, according to Reis Inc. While that is still an improvement, it is the slowest rate since the recovery began in 2010; vacancies fell by an average 35 basis points every quarter from 2010 and 2011.

"Demand for apartments still clearly outstrips supply growth, with absorption figures higher than construction, and vacancies declining. Still, there is cause for concern in the near-term that demand is abating for multifamily, just as a veritable avalanche of new projects begins to open their doors early next year," notes Reis economist Victor Calanog.

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The change in occupied apartments also slowed to the lowest rate of absorption since the first part of 2010 and represented less than half the quarterly average of the past two years. This is particularly concerning, given how many new apartments are under construction and scheduled to open in the next two years. Multi-family housing starts were up 37% in August from a year ago, according to the U.S. Department of Commerce.

Reis estimates that accounting for delays and cancellations, between 160,000 and 200,000 new units will open in 2013. In 2014 that "total" figure (not adjusted for delays) exceeds 320,000. That is in the 79 markets it tracks, where only 41,000 or so units were built in 2011. The average annual figure from 2001 to 2008 was about 120,000.

Many analysts still believe apartment demand will remain robust in the near term, relative to where it has been historically, as so many potential home buyers are shut out of the mortgage market due to damaged credit. They also point to a shift in the homeownership mentality of younger Americans, who have seen what the housing crash did to their parents and who are gravitating more and more to urban centers.

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