Apartment Construction Continues to Improve

Completions of unfurnished apartments for rent or sale in 5+ unit properties climbed to more than 30,000 units during the third quarter of 2012, a 20% increase versus the third quarter of 2011. The Survey of Market Absorption of Apartments (SOMA) tracks completions and market absorption rates (units rented or sold after construction of the property is complete) for apartments sold or rented in 5+ unit properties. The three-month absorption rate of unfurnished apartments declined during the fourth quarter of 2012, slipping four percentage points to 64%. The absorption rate has averaged just above 60% during the last four quarters.

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Absorption rates for condo and co-op units have improved compared to the numbers observed in the post-bubble aftermath. For those units completed during the third quarter and sold during the fourth quarter of 2012, the 3-month absorption rate dropped to 57% (from 66%), which is identical to the rate averaged over the past four quarters. Even though absorption rates have trended higher from their cyclical lows, the volume of condos and co-ops being built and sold remains incredibly weak. During the third quarter of 2012, a total of 1,700 condos and co-ops were completed—29% below year-ago levels. Moreover, completions are down 94% compared to the peak levels observed at the end of 2006. The forecast calls for condo/co-op construction to continue rising, but we expect their share of overall multifamily housing production to see only modest increases going forward.

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The SOMA data also enable one to drill down further into other types of multifamily units completed in a particular quarter. Nearly 12,000 units tied to affordable housing programs such as the Low-Income Housing Tax Credit (LIHTC) were completed during the third quarter, a 9.2% improvement from the prior year. Overall, LIHTC and other affordable housing program apartments accounted for nearly a quarter of all completed units in the third quarter of 2012.

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