US Apartment Market Historical Behavior and OutlookIn these times of uncertainty it is quite insightful to understand how the apartment market has behaved historically and understand its sensitivities to major macroeconomic forces like the rate of growth of the economy, as measured by real GDP. The graph below portrays completions and absorption of new rental apartment units in the US from 1970 to 2008, based on data provided by the Census Bureau, Department of Commerce and the Office of Policy Development and Research, Department of Housing and Urban Development. As the graph shows, the highest number of rental apartments were completed in 1972 and 1973, reaching 497,900 and 531,700, respectively. During those two years the economy grew at very high rates of 5.3% and 5.8%, respectively, which were among the four highest rates registered over the 31-year history covered by the data.
The impact of the severe economic crisis and the US apartment market malaise is more obvious when we look at apartment absorption rates as percent of the completed units. The above graph portrays particularly the average percent rented in 3 months as measured by the Survey of Market Absorption carried out by the Census Bureau, which samples nonsubsidized, privately financed, unfurnished apartments in rental buildings of five or more units. As the graph indicates, the absorption rate in the US apartment market has been fluctuating between 63% and 82% over the period 1970-2001. However, by 2006 it fell below 60% and by 2008 it dropped to 51%, its lowest level in the last 31 years. The highest absorption rate of 82% was registered in 1978 and 1979, when the economy was growing at 5.6% and 3.1%, respectively. The apartment absorption rate, which represents the demand side should in theory be influenced by economic growth, as rising economy goes with rising income, which has opposing effects on demand for rental units. On one hand, it allows renters, to move to homeownership, but on the other hand it allows young singles living with their parents to move out of the family home and rent their own apartment. The figure above that graphs GDP growth against the apartment absorption rate, does not portray any clear relationship in their movements up to 1996. However, after that year, they seem to move pretty much together, with their movements appearing even more synchronized and closely linked over the period 1999-2008. If this relationship holds this year and thereafter, it suggests that in 2009, the absorption rate in the US apartment market will decline even further below the 2008 level, since GDP growth is expected by general consensus to be in the negative territory and surely lower than the growth registered in 2008.
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