The Survey of Market Absorption of Apartments (SOMA) indicated an increase in rentals and sales of newly-built apartments during the third quarter of 2012. The SOMA tracks completions and market absorption rates (units rented or sold after construction of the property is complete) for multifamily rental and for-sale housing in 5+ unit properties. The most recent release of absorption rates covers properties that were completed during the second quarter of 2012.
In terms of unfinished apartments, the three-month absorption rate increased to 70% in 2012Q3 after posting a reading of 59% during the second quarter. Over the past four quarters the absorption rate has averaged nearly 63%–the best performance since mid-2005. Completions picked up significantly from the previous quarter, totaling 26,600 units, which was the highest level of newly-built units since mid-2010.
The condo and co-op sector has seen the 3-month absorption rate trend higher from the cyclical lows observed between late 2008 to mid-2010. The three-month absorption rate for units completed during the second quarter of 2012 and sold during the third quarter inched higher from 65% to 66%. Over the past four quarters the absorption rate has averaged nearly 64%, marking the highest reading in five years. Despite the improved absorption rate, the condo/co-op market continues to struggle as completions reached a new recorded low as only 1,100 units were completed during the second quarter of 2012. This represents a 96% drop in production compared to the peak. Leaner inventories should bolster condo and co-op construction activity going forward, but we expect these units will maintain a diminished share of overall 5+ multifamily production.
In addition to these data, SOMA allows one to track the particular types of multifamily units that are completed in a given quarter. After making up an average of nearly one-third of completions in the previous four quarters, Low-Income Housing Tax Credit (LIHTC) and other types of affordable housing units accounted for approximately 17% of completions during the second quarter.
The SOMA data illustrate the importance of the LIHTC program in terms of supporting multifamily construction activity, job creation, and providing affordable housing during the housing market downturn. Two policy changes helped to ensure that LIHTC-related production did not suffer during 2009 and 2010.
First, the LIHTC exchange program, enacted by the 2009 American Recovery and Reinvestment Act stimulus legislation, ensured equity was available for the LIHTC program. Second, the 2008 Housing and Economic Recovery Act temporarily fixed the LIHTC new construction credit at a 9% rate (absent the legislation, the credit rate would be at approximately 7.4% today, resulting in less affordable housing investment funding).
This second item is important to note because the fixed 9% rate has effectively expired and efforts are underway to ensure that it is extended and prevents a drop-off in LIHTC multifamily construction activity.