By DAWN WOTAPKA
Vacancy in apartment buildings fell to the lowest rate in more than two years in the first quarter, setting the stage for fewer choices and higher rent for tenants.
With the economy adding jobs, and with more people choosing to rent instead of buy homes, the nation’s vacancy rate came in at 6.2%, down from 6.6% in the fourth quarter and 8% in the first quarter a year ago, according to data released Wednesday by Reis Inc.
This increasing demand has allowed many landlords to scale back on freebies and increase rent. The average effective rent, or the amount paid after discounting, rose to $991 in the first quarter from 2.5% a year earlier, according to Reis, which collected data from 82 major markets.
“You don’t often see occupancy and rents increasing at the same time,” says Rich Anderson, a REIT analyst covering the multifamily sector for BMO Capital Markets. “It’s a great fundamental picture today.”
Thanks to the bullish outlook, apartment buildings are being bid up close to boom levels in some of the hottest markets. Last month, UDR Inc., a Denver-based REIT, said it would pay $260.8 million for its first Manhattan building.
Also, many of the nation’s apartment owners have ramped up construction. Home Properties Inc. said Tuesday it started a 314-unit community in Fredericksburg, Va., that should be finished by 2012.
It also aims to break ground on a Maryland development later this year.
“Now is the time to start development,” said David Gardner, Home’s chief financial officer. “We’re expecting to see some great returns.”
The CoStar Group expects about 22,500 units to be added this year, followed by 94,600 in 2012 and more than 109,000 in 2013. Of course, that might put downward pressure on rents and occupancy levels.
“Supply will come in and rain on the parade as it always does,” Mr. Anderson says. “It’s just a matter of when it will happen.”
The market improvement also could stall or reverse if employers don’t keep adding jobs. But, for now, few industry watchers are worried.
“Expect vacancies to continue declining, and rents rising through the rest of 2011 at an even faster pace,” Reis wrote in the report.
Rental activity during the winter season is typically slow because consumers prefer to avoid apartment hunting and moving in chilly weather.
But landlords filled 44,000 more units than were vacant in the first quarter, the strongest first quarter in a decade.