Strong First Quarter Demand a Welcome Sign for Apartment Owners

Apartment demand in the United States continues to outpace typical seasonal trends, with the rollout of coronavirus vaccinations helping to drive one of the best first quarters for demand over the past decade.

Demand came in stronger than the usual fourth quarter trend to close out 2020, and that momentum carried into the new year. Nationally, apartment demand, or net absorption, totaled more than 100,000 units in the first quarter. That is significantly stronger than the roughly 65,000 units absorbed in the first quarter of 2020.

And with only about 70,000 units completed during the quarter, the national vacancy rate fell about 20 basis points, to below 6.6%.

As COVID-19 vaccination numbers continue to climb, and the broader economy recovers, individuals are feeling more confident in forming households, contributing to a robust demand environment. The acute shortage of for-sale housing is also probably serving as a tailwind for apartment demand, as would-be buyers are finding little available housing inventory in nearly every U.S. city.

All but two of the country’s biggest cities posted positive net absorption in the first quarter, but more areas saw a quarter-over-quarter slowdown in demand. Of the largest 54 metropolitan areas, 39 saw net absorption strengthen in the first quarter of 2021 compared to the fourth quarter of 2020, while net absorption weakened in 15 regions.

The greater Sun Belt region continues to top every list for housing demand, with the usual suspects of Dallas-Fort Worth, Houston, Atlanta and Phoenix leading the pack once again.

But some large, expensive markets are starting to see multifamily demand rebound as well. Two previous laggards, New York and Chicago, also ranked in the top 10 for the strongest net absorption last quarter. That is likely the result of renters anticipating a return to the office after having spent the past year largely working from home because of the pandemic.

Net absorption in New York went from slightly negative in the fourth quarter to positive 3,300 units last quarter. Not only did that rank the Big Apple in the top five of regions on that basis in the first quarter, but it represented the largest quarter-over-quarter improvement in the country.

Chicago was one of the few cities that saw negative net absorption in the fourth quarter, but the Windy City bounced back in a big way to start the year. The region’s roughly 2,400 units of positive net absorption in the first quarter represented a 2,500-unit increase compared to the fourth quarter of last year.

Los Angeles was another big winner in the first quarter, as its 2,200 units absorbed was its best performance since mid-2019.

The list of top metropolitan areas for annual net absorption hardly moved compared to last quarter, as the top six regions all retained their positions on the list.

Some of the biggest movers were Austin, Texas, which shot up the list into the top 10 with its best quarter for net absorption since the second quarter of 2019, and Philadelphia, which fell just outside the top 10.

The regions with the weakest first quarter performance are some of the areas that renters flocked to at the outset of the pandemic. For example, many New Yorkers fled to Long Island during the pandemic in search of cheaper rents. But Long Island saw its absorption slow from the fourth quarter and ranked among the weakest markets for demand in the first quarter of 2021.

The same was true for Southern California pandemic stalwarts San Diego and the Inland Empire. In fact, those two markets saw the steepest declines in quarterly absorption from the fourth quarter of 2020 to the first quarter of 2021. Los Angeles seems to be recapturing some of the residents that fled to these neighboring markets as the economy continues to rebound.

Despite a strong first quarter, New York remains in the red in terms of annual net absorption. But the good news is that at this point, only New York and the Bay Area region have negative year-over-year net absorption, with Los Angeles and Chicago both entering positive territory after strong first quarters.

The national multifamily market is heading into the traditional prime spring and summer leasing season on an upward trend. However, continued improvement in apartment demand will still depend heavily on the nation’s vaccine rollout and economic recovery. But even if demand cools over the next few quarters, apartment owners should be able to retain some pricing power, as the nation’s construction pipeline is slowing in most large metropolitan areas.

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