Realtors Predict Stronger Multifamily Market for 2011

Multifamily rental properties will see a decrease in vacancies as well as modest rental increases next year.

Dees Stribling, Contributing Editor

Washington, DC–In its most recent commercial real estate report, the National Association of Realtors is predicting that most kinds of CRE fundamentals will continue to weaken through the end of 2011. The exception to the pattern, says the organization, will be multifamily rental properties, which will see a decrease in vacancies as well as modest rental increases next year.

As of the first quarter of 2010, according to NAR, the national multifamily vacancy rate was 7.3 percent, down slightly from 7.4 percent in the fourth quarter of 2009. Only about 12,250 multifamily units were absorbed in 4Q09, compared with more than 58,300 units the quarter before, so it was a grim time for apartment owners. But the absorption numbers spiked upward in 1Q10, when nearly 27,200 units were absorbed.

Over the next four quarters, NAR predicts a steady downtick of multifamily vacancy rates until a full percentage point of the 1Q10 rate has been shaved off. In other words, vacancies will be down to 6.3 percent by 1Q11.

A significant increase in net absorption in the quarters ahead–with one exception–will be one of the drivers of the downward movement of multifamily vacancy rates. As the economy creates jobs in the second half of 2010, one of the immediate results, says NAR, will be household formation, and most of those households will be apartment dwellers.

Thus in 2010 as a whole, about 145,600 multifamily rental units will be absorbed; in 2011, 214,500 will be. The only quarter in the near future that will see negative net absorption is 4Q10, when about 39,200 units will be added to the national inventory. These represent some of the last major developments off the drawing boards and funded before the credit freeze in 2008.

A drop in the completion of new units will be the other major driver in lowering vacancy rates for multifamily properties. In 2009, some 177,500 units were completed, according to NAR. In 2010, there will be 59,300 and in 2011, only 53,300.

Multifamily rents, which have been declining for some time now, will regain some ground by 2011. After a 3.6 percent drop in 2009 and a 1.5 percent drop in 2010, predicts NAR, rents will recover a modest 1.2 percent in 2011.

As it happens, multifamily is the only bright spot for CRE in 2011, the organization concludes. In contrast to lowering vacancies and rising rents for multifamily properties, office, industrial and retail properties will all continue to see higher vacancies and mostly lower rents in 2011.

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