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Apartment Demand Ebbs as 'Avalanche' of New Units Open

"Renting an apartment offers extreme flexibility in today's techie generation and offers sociability," says Alexander Goldfarb of Sandler O'Neill. "It's huge how much kids want to be with other kids, and apartments lend themselves well to that. We are not seeing a sudden wave of people moving out to buy homes, even though housing is finding a floor."

In fact, Goldfarb says the move-out rate is now at 16%, below the historical average of 20%. The biggest issue for the big apartment REITs, like Equity Residential (EQR), Avalon Bay (AVB), Essex (ESS) and Camden Property Trust (CPT) , he adds, is slowing growth rates. The stocks themselves are down and underperforming because investors expected this to be the peak year for the sector.

"Does that continue or do other trends boost them?" asks Goldfarb. "When you look at absolute growth rates, it will look very good relative to other sectors, and that will bring investors back to apartments."

Goldfarb does not believe that the burgeoning single family rental market is taking share away from the multi-family sector, but others say it could play a role, especially for lower income families looking for more space. Investors in some of the hardest hit housing markets have been buying up as many distressed properties as they can find, citing new demand.

"I see unprecedented demand, more than I've ever seen in 15 years," says James McClelland, CEO of Chicago-based MACK Companies, a rental property investment group. "Our waiting list is already up to 4 months. if you pass our criteria to become one of our renters you get the honor of sitting on a four month waiting list until the next home is available to you."

The housing market may be recovering, but it is far from a robust recovery, and the lessons learned in the latest crash will likely keep rental demand high. Given where other commercial sectors are with vacancy rates, apartments are still the healthiest; it remains to be seen what all the new supply will do to the fundamentals over the long term. Analysts say 2014 is the year to watch.

--Written by Diana Olick at CNBC

CNBC is a world leader in business news, providing real-time financial market coverage and business information.
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