Interesting Times

CBRE-EA, the market forecasting arm of real estate services company CB Richard Ellis, expects the U.S. apartment vacancy rate to fall to 7 percent in 2010, down from 7.3 percent in the third quarter and 7.4 percent in the second quarter 2009.

"Overall, the U.S. apartment market remains in uncharted waters with vacancies at high levels historically, amid continued job losses and a glut of housing for rent and for sale," Gleb Nechayev, CBRE-EA senior economist said. "While the economic outlook does call for job growth to resume next year, vacancy rates will remain at historically elevated levels in most markets."

The long-term vacancy rate for professionally managed U.S. apartments has been about 5 percent.

"We're a long way from that. It will be at least a couple of years before we move closely to a more normal level," Nechayev said.

The slump in demand has severely damaged the sector, which until last month had the highest delinquency rate among U.S. property types.

Apartment loan delinquencies rose to 7.4 percent in November, second only to hotels, which reached 7.8 percent, according to ratings agency Moody's Investors Services.

Apartments and hotels suffer downturns first, because of their short-term leases, but traditionally lead a rebound when an economy improves.

A glut of single-family homes and condominiums on the market has been a double-edged sword for apartment landlords, Nechayev said.

Lower home ownership and the reduced demand for houses has forced people to become renters, Nechayev said.

New households formed from immigration, divorce and graduation has helped counter the damaging effect from job losses.

"Without the growth in overall rental demand, the effect of job losses on apartments would be much more severe than it has been so far," Nechayev said.

But the housing supply will continue to compete with and mitigate demand for apartments, which actually has risen over the past two quarters he said.

CBRE-EA forecasts effective rents will drop to $1,147 in 2010, down 0.8 percent from the third quarter 2009.

Markets such Austin, Baltimore, Boston, Chicago, Denver, Los Angeles, Seattle, San Diego, and Washington D.C have reported more occupied than vacant apartments.

Landlords in those cities offered rent concessions to lure tenants or keep existing ones, Nechayev said.

CBRE-EA does not expect rents nationally to start growing in earnest until the second half of 2011. The average U.S. apartment rent has been falling for the past year, down to $1,156 in the third quarter.

"We still expect some weakness in rents and occupancy next year," Nechayev said. "All in all, 2010 should be a somewhat better year than 2009."

Ilaina Jonas, Reuters, 12-14-09