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Apartment Occupancy Up in Nearly All Markets Since Pandemic
By Gay Cororaton, Senior Economist, Director of Housing and Commercial Research, National Association of REALTORS®
The apartment market is booming. Based on the National Association of REALTORS®' (NAR) analysis of CoStar market data in 138 markets, net absorption (change in the number of occupied units) rose by 207,035 units in the second quarter of 2021 from the prior quarter. CoStar’s data consists of 16.6 million apartment units, or about 60% of the 27.6 million renter-occupied housing units identified in the American Community Survey for 2019. In 2019 Q2, a pre-pandemic period, net absorption was only 116,526 units, about half the current pace. From 2020 Q2 through 2021 Q2, 137 out of 138 areas experienced an increase in the number of occupied units (positive net absorption), with San Francisco as the only metro area that still had a negative net absorption of 2,730 units, according to NAR's analysis of CoStar data.
Decline in Apartment Occupancy Due to Pandemic Was Concentrated in Very Few Markets It is worth pointing out that pandemic-triggered declines in apartment occupancy were concentrated mostly in the New York City area and in West Coast markets. Areas with negative net absorption were San Francisco (-6,958 apartment units); New York (-4,371 units); South Bay/San Jose, California (-2,791 units); East Bay/Oakland, California (-445 units); Chicago (-337 units); Pittsburgh (-71 units), and Yakima, Washington (-30 units).
Other large markets did not experience negative net absorption during any of the quarters since the onset of the pandemic. The largest gains in occupancy during the period from 2020 Q2 to 2021 Q2 were in Atlanta; Austin, Texas; Boise, Idaho; Dallas, Denver, Houston, Orlando, Florida; Philadelphia, Phoenix and Portland, Oregon.
One reason some markets have experienced a decline in apartment occupancy is the makeup of the workforce. West Coast markets have a heavy concentration of technology workers (14% of San Francisco's workforce is in professional, scientific or technical services, compared to 7% of the workforce nationally), while New York City is a major financial center, headquarters to many corporations and a tourist destination. At the height of the pandemic (2020 Q2), demand plummeted in New York City and West Coast markets as workers stayed home and business and leisure travel were curtailed. As of June 2021, on a national basis, 50% of mathematical and computer workers and 40% of legal occupation workers are still working from home, according to the U.S. Bureau of Labor Statistics COVID-19 CPS supplemental data.
The profile of workers isn’t the only reason some markets suffered huge occupancy declines. The affordability of other markets was also a factor. Affordability bears heavily on job creation; companies want to locate their businesses in a market area that is attractive to workers because housing is affordable. In New York, the median effective rent from 2020 Q2 to 2021 Q3 was $3,764; in San Francisco, $2,746; and in East Bay/Oakland, $2,163. These are high compared to the median effective rents in Dallas, at $1,201; Houston, at $1,100; Atlanta, at $1,284; and Phoenix, at $1,231.
In May 2021, 294 out of 427 metro areas had an increase in nonfarm payroll employment (seasonally adjusted) compared to the prior month. Dallas-Fort Worth created 14,900 jobs; Houston, 8,800 jobs; Atlanta, 6,000 jobs; and Phoenix, 10,200 jobs.
Rent Outlook The relative affordability of smaller markets may be less pronounced in the future. Due to strong demand for apartments, rents are rising strongly. Only South Bay/San Jose and San Francisco have lower rents as of 2021 Q2 compared to one year ago. In all other markets, rents are up from one year ago. In New York City and Oakland, rents have recovered, with the effective rents up by less than 1% from one year ago.
In 39 markets, rents are rising at a double-digit pace. As of 2021 Q2, the steepest rent increases on a year-over-year basis were in Port St. Lucie/Fort Pierce, Florida (21%); Tampa/St. Petersburg, Florida (20%); Myrtle Beach, South Carolina (20%); Phoenix (19%); Boise, Idaho (18%); Las Vegas (18%), Spokane, Washington (17%); Atlanta (16%); Jacksonville, Florida (16%); and Savannah, Georgia. (16%).
Expect markets with low vacancy rates to show strong rent growth. That includes the California markets of Inland Empire, Orange County, San Diego, Los Angeles and Sacramento.
Other markets with low vacancy rates will likely continue to experience sustained rent growth—markets like Tampa, Florida, Phoenix, Las Vegas, South Florida, Philadelphia, and Hampton Roads, Virginia.
Vacancy rates are not as tight in Atlanta, Dallas and Houston, but rents have been growing at a strong pace due to the net in-migration in these areas.
Rents are likely to rise a bit in Oakland, San Jose and San Francisco as more workers return to the office, but the high vacancy rates will keep rents growing at a modest pace compared to other markets.
Gay Cororaton is a senior economist, Director of Housing and Commercial Research for the National Association of REALTORS®.