The nationwide growth in effective rents has been the catalyst of the boom in multifamily construction. This rent growth has averaged above 3% since the end of the recession.
In fact, they have accelerated in 2015 with a growth of 4.7%, according to commercial real estate research firm REIS®, and are expected to continue to grow in 2016 and beyond. Effective rent averages $1,180 per unit today, the highest amount on record. Rent growth and average effective rent growth can vary substantially according to the market, with popular markets experiencing rent spikes significantly higher than the national average.
Vacancy has remained virtually flat since 2013 and sits at 4.4% nationally as of 2015. This represents full occupancy from an economic standpoint and indicates that landlords are choosing to push rents rather than achieve full physical occupancy. Given the increasing rate of rent growth, it is logical to suspect that most landlords are experiencing significant growth of net operating incomes and cash flows, and those with fixed debt rates will enjoy even more growth in this dimension in 2016. Of course, the quickening of new supply additions will impact the market and thus REIS® fore- casts vacancies to actually move back over 5% in the next few years; but they also predict effective rents to continue to average over 3% growth.
New supply deliveries now sit significantly higher than pre- 2007 levels and are projected to grow even higher in 2016. In fact, net absorption fell behind completions in 2015 with 168.3 thousand units absorbed while 192.0 thousand units were delivered. This trend is also forecast to continue in 2016 and beyond. Thus, the fears of oversupply are not complete- ly irrational. Still, the pace of household formation and job creation combined with demographics that favor renting are likely to keep supply and demand in balance nationwide.
On a local basis, it is highly plausible that certain markets and even sub-markets will break from the national trend and see falling effective rents and rising vacancies as too much supply is added at once. Thus, it is important to examine the specific characteristics of each market before investing or developing. With that in mind, there still exists a great deal of opportunity in many markets for savvy investors and builders.