Burning Off the Apartment Sector's Shadow Market Competition

 It's an odd bunch of metros on the list of the nation's recent apartment demand leaders.

In one camp are areas like Austin and San Antonio. Those locales added lots of new supply that progressed through initial lease-up at a rapid pace during the past year. And, at the same time, move-outs from their existing stocks were held to minimal levels since recent job cuts proved comparatively mild. Austin absorbed almost 7,800 apartments during calendar 2009, and the demand tally in San Antonio reached a little over 4,400 units.

In the perhaps more surprising story, top absorption centers for the past year also include several markets that added only a few new apartments that would help stimulate leasing activity and that suffered dramatic job losses that would have drained renters from their existing apartment inventories during a normal economic cycle. What pushed up apartment demand in those areas was a resurgence of home and/or condo sales, reducing the volume of shadow market alternatives offered for rent, after those other options had captured an unusually large share of total rental demand over the previous year or two. In a pair of the most striking examples of this pattern, the Inland Empire posted demand for just over 3,700 apartments during calendar 2009, and Orlando absorbed nearly 3,500 apartment units.

Taking a closer look at the Inland Empire's performance, the demand for about 3,700 apartments during 2009 came during a period when the Bureau of Labor Statistics reported the loss of roughly 51,000 jobs. But single-family home sales that had been running at approximately 3,000 units monthly during 2007 and early 2008 climbed to 6,000 to 7,000 units per month during 2008's last half and then continued at that pace throughout 2009. Calendar 2009 sales reached more than 86,000 units, according to DataQuick, topping 2008's volume by 26 percent.

In Orlando, 2009's demand for almost 3,500 apartments occurred when job loss came in at roughly 40,000 positions in the Bureau of Labor Statistics data. But shadow market rental inventory was drastically reduced when sales of single-family homes and condos shot up 61 percent on an annual basis, reaching right at 29,600 units according to the group Florida Realtors.

With apartment absorption back at a substantial volume, occupancy in the Inland Empire improved by 1.2 points during 2009, though the year-end rate still was low at 92.4 percent. Orlando's occupancy performance rose by 0.5 points over the past year, though that still left the December reading at a very weak level of 89.6 percent.

Looking ahead, MPF Research anticipates that the Inland Empire and Orlando should show some of the strongest apartment occupancy momentum seen anywhere across the country during 2010, primarily reflecting further reduction of shadow market rental alternatives.

Important to realize, recovering for-sale product markets in the Inland Empire and Orlando will only help the apartment sector's occupancy performance for a limited time. Because investors account for so many of the recent purchases in these areas, some of the shadow market alternatives taken out of the rental pool recently will circle back into the stock at some point. Furthermore, once job gain returns, owner occupants should begin to take on a larger role in the overall buyer profile, pushing up the loss of apartment renters to home purchase, particularly given that the premium to buy versus rent housing has been completely wiped out in both areas.

*Portions of data collected were collated utilizing property management software, and various city, county, and state records.

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