Apartment vacancies in the United States hit their highest level in 22 years in the second quarter of 2009. Job losses are to blame, according to Bloomberg, as tenant demand falls when people don't have any income. Vacancies rose to 7.5% from 6.1% year-over-year, according to Reis Inc. But this still doesn't reach the 1987 level of 7.6%. In June, the U.S. unemployment rate hit a 26-year high, with payrolls dropping faster than expectations.
Conventional wisdom has it that potential homebuyers turn into renters when the job market softens. The rental pool is shrinking, however, leading to the high rate of apartment vacancies as landlords struggle to fill units. Asking rents for apartments fell 0.6% last quarter (for the second in a row), according to Reis, the largest fall since the company started to track this measure in 1999. Overall, asking rents (including other types of residences) were off 0.7% year-over-year, down to an average of $1,040 a month.
Rents paid by tenants, on the other hand, fell 0.9% from the previous quarter, reaching $975. Effective rents were off 1.9% from the previous year.
Meanwhile, the amount of space occupied nationwide increased by 2,530 units. This wasn't enough for a net percentage gain, though, as 22,696 new units came on the market last quarter (with 47,000 for the first half of the year). For 2009, more than 100,000 new units are expected to be completed.
Insights from the Ground
So, supply is outpacing demand, and the pool of potential renters is shrinking. Where are they going? An increasing number of formerly independent people are moving back in with their parents or finding roommates. The latter can lead to a particularly troubling dynamic for landlords (I have anecdotally). Granted, New York hardly reflects the reality across the country, but an increase in vacancies seems to have occurred because of roommate layoffs.
How does this work?
Two roommates, together, can afford a pricey Manhattan apartment. One loses a job ... and neither can afford to stay, since one person can't handle the rent alone. I've seen a fair amount of vacancies come from this situation. The archetype appears to be two or three people in their mid-twenties on their first or second jobs out of college and earning enough that they can make the rent (together) but have to stretch a bit. When one person loses a job, there is limited time to find a new roommate, as those remaining can rarely absorb the lost share of the rent. Without a new roommate, they are forced to leave the apartment.
Volatility among younger, more junior employees -- who have had less time to develop safety funds for this type of situation -- thus can have a more pronounced and immediate effect on the rental market.
Stability will come back to the rental market when tenants can afford rents sufficient for landlord returns. This can only happen with the job market events out a bit, especially for younger employees who share somewhat expensive apartments.
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