Apartment Vacancy Rate Set to Break Record

Even as home ownership rates dip, landlords are having an increasingly difficult time finding tenants.

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Even as the U.S. home ownership rate dips to a six-year low, landlords are having an increasingly difficult time finding tenants. The national apartment vacancy rate hit 7.8 percent in the third quarter, its highest level since 1986, according to a new report from real estate research firm Reis. Moreover, since vacancy rates increased even during this traditionally strong period, landlords should expect rental demand to erode even further from here, says Victor Calanog, a Reis research director. "If things were weak this time around, you can expect that during the colder months, things will be even weaker," Calanog says. "We started monitoring this around 1980—we are going to break all-time highs." Here are five things you need to know about the development:

1. Household formation: The eroding demand for apartment rentals is rooted in the collapse of household formation, Calanog says. With more than 7 millions jobs lost since the onset of the recession—and the unemployment rate heading for 10 percent—many recent college graduates are moving back home with mom and dad rather than renting an apartment while they look for a job, Calanog says. At the same time, some laid-off workers have been forced to move in with friends or family. "The massive job losses that we have incurred since the beginning of this recession are really eating into household formation," Calanog says. "Households just aren't being formed."

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2. New development: Just as demand dissipates, the rental market is adding supply. Reis projects that more than 100,000 new rental units will open their doors this year. That's roughly the same number of new units that became available in each of the previous three years, when demand was stronger. "We are still encountering [additional] supply coming on line even as demand has turned inwards significantly," Calanog says. "We are really worried about that."

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3. Monthly rental payments declining: Not everyone is complaining. Just as the housing crash has created bargain opportunities for would-be buyers, skyrocketing rental vacancy rates can benefit apartment seekers. As they struggled to attract tenants, landlords reduced their asking prices in the third quarter by nearly 2 percent from a year earlier. "You basically have to lower your asking price . . . just to get tenants through the door," Calanog says.

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4. Where did they go? With rental vacancy rates rising even as homeownership declines, it's only natural to wonder where all the demand went. Calanog says many people—who might otherwise have rented an apartment or purchased a home—have moved in with friends or family until the economic dust settles. "Everyone is in a holding pattern, waiting for things to stabilize," he says.

5. Turnaround: Apartment vacancy rates are now 2.3 percentage points higher than their 2006 cyclical lows of 5.5 percent; the natural vacancy rate in economic theory is around 5 percent, Calanog says. And it will be difficult for the rental market to tighten up until the labor market improves. "The first thing that needs to happen is that the labor markets need to stabilize," he says. "There needs to be at least some hiring at the margin." But Calanog doesn't expect the job market to turn around for some time. "Don't get me wrong—I'm not going against the Fed—I think the technical recession is over," he says. "But it takes about two years for the labor market, unfortunately, to catch up to that pronouncement."