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U.S. Economic Outlook: February 2016

Rental Apartments in Demand: Rent Growth and Low Vacancy Drive New Development

Frank Nothaft    |    Housing Trends, Videos


If you have looked at the rental apartment market recently, whether to rent an apartment yourself or to invest in a building, you likely noticed that apartments are more expensive and less widely available than a few years ago.  That’s the case in most metro areas throughout the country, namely that rents are up and vacancy rates down, and these trends are clear in nationwide data. 

Apt Markets are tightening

Apt Markets are tightening

The National Multifamily Housing Council conducts a quarterly survey of apartment building managers and owners and asks them whether or not the rental apartment market has ‘tightened’ in metros they follow[1].  For nearly every quarter over the last five years, rental apartment conditions have gotten ‘tighter,’ meaning that rents have risen and vacancy rates have come down (see Exhibit 1).  And in most metro areas in the country the rental apartment market continues to ‘tighten’.  These survey results are consistent with broad market data.  For example, as measured in the Consumer Price Index, rent was up 3.7 percent during 2015 compared with virtually no inflation in the rest of the index[2].  And the Census Bureau has reported that rental vacancy rates are at their lowest levels since the 1980s. 

Rental Construction in 2015 highest since 1986

Rental Construction in 2015 highest since 1986

Developers have responded to these economic forces by increasing construction of new rental apartments.  New building has ramped up after the Great Recession trough, and rental apartment starts in 2015 were at the highest level since 1986 (see Exhibit 2).  And while some new buildings come with additional amenities, the typical apartment under construction today is about 1,100 square feet per unit -- about the same size as in 1999 when measurement data were first compiled.

Even though vacancy rates are the lowest in a generation, it’s natural to wonder whether there are enough tenants to rent the increased supply of new apartments.  Absorption data, which measures the occupancy rate of newly completed apartments, indicates that demand has been sufficient to lease the new units relatively quickly.  Three- and six-month absorption rates are at their highest levels in a decade (see Exhibit 3).  In fact, for rental apartments completed during the second quarter of 2015, nearly two-thirds were rented within three months.

Absorption in 2015 Fastest Decade

Absorption in 2015 Fastest Decade

The high level of new starts last year means that 2016 will have an even larger number of new apartment completions.  In some local markets, the new supply has already alleviated tight conditions, leading to slower rent growth and greater availability of apartments.  More metros will experience rent moderation and vacancy increases in 2016, and competition for quality tenants among building managers will intensify.  While national data currently show relatively low vacancy rates and rent growth that’s faster than inflation, some metro markets will begin to see ‘looser’ conditions.

1Market Tightness Index reading above 50 indicates that, on balance, apartment markets around the country are getting tighter; a reading below 50 indicates that market conditions are getting looser; and a reading of 50 indicates that market conditions are unchanged. See

2 Rent of primary residence in the Consumer Price Index (CPI) was up 3.7 percent during the 12 months through December 2015; the CPI less Shelter was down 0.5 percent over the same period.

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