Commercial Property Update: Apartment Markets Led the Way in the Third Quarter
November 9, 2017 | Calvin Schnure | Nareit
The apartment market led the way among commercial property markets in the third quarter, as robust demand pushed down the national vacancy rate and supported rent growth. Office, retail and industrial property markets each saw some easing of demand growth, leaving vacancy rates flat to up slightly. Rent growth has slowed from the rapid pace enjoyed in 2015 and 2016.
The news on the apartment market is particularly interesting, as many observers had noted how conditions softened last year amid a wave of new construction (chart above, completions shown in dark blue, with the sign reversed). Completions reached 68,000 units in the spring of 2016 and another 65,000 in the summer. Net absorption slowed last year as well, fueling concerns that the market was entering a downturn.
What a difference a year makes! The supply pipeline has eased off, with 56,000 apartment units completed in the third quarter, the slowest in a year and a half. Net absorption, however, posted a sharp rebound to greater than 70,000 units in both the second and third quarters, likely reflecting the “pent-up demand” represented by millions of households that are doubled up with family members or other roommates. As noted in prior Market Commentary, we estimate this pent-up demand will generate a need for as many as 3 million additional homes and apartment units to relieve the housing shortage that exists in most markets. It will take more than a few years of construction at current rates to meet this demand, and we expect apartment market conditions will remain tight for the foreseeable future.