Looking Good
Apartment statistics show marked improvement. Multifamily occupancy levels increased in the first half of 2005, thanks to low completion levels and substantial conversion activity, according to research firm Marcus & Millichap. That boost has been the key driver of the improvement recorded in the accompanying revenue index, a figure that is calculated by multiplying occupancy by the average inflation-adjusted effective rent.
Other findings in this quarter’s analysis:
- After bottoming at 89 percent in late 2002, the revenue index improved to 93 percent of 2000 levels in the first half of 2005.
- The second quarter of 2005 marked the sixth quarterly gain in a row in the revenue index.
- Occupancy gains were the top source of improvement in the index. The national occupancy rate rose to 93.6 percent in the second quarter of 2005.
- Conversion sales continued to accelerate during the quarter. More than 68,000 units have sold for conversion this year– nearly three times the 23,000 units sold during the same period last year.
- Sustained job growth has supported increased demand. As of July, more than 1.3 million jobs have been created this year, a number comparable to the rate of growth during the same period in 2004.
- Modest effective rent growth of 1.1 percent was recorded during the first half of this year. The average effective rent is currently $886 per month.
- Apartment completions have slowed so far this year, as indicated by the completions index. In the second quarter of 2005, completions as a percent of inventory were only 40 percent of the 2000 average.
Upward Trend
The first MFE Index shows markets’ recovery.
The MFE Index, published quarterly, reviews the national apartment market performance and analyzes its fundamentals in partnership with Marcus & Millichap, an Atlanta-based brokerage firm. The indeces, such as the revenue index and the completions index, are indexed to the last cyclical peak (year 2000 = 100) to provide insight as to where current fundamentals stand in relationship to the height of the market.
To date in 2005, the recovery is gaining traction as the combination of inventory reduction from condo conversions and stronger leasing activity support improving occupancy. As a result, effective rents are rising as concessions burn. Marcus & Millichap expects occupancy to rise to 94 percent by year end, and effective rents will post a 2-plus percent gain for the year. Barring a major shock, there are no signs that the recovery will stall in 2006. These factors underpin the firm’s current expectation that, on a national basis, the apartment market will be nearing equilibrium going into 2007.