In Philly area, a strong 2013 apartment-rental market

Although there is some evidence that the economy is sputtering a bit, it appears to be strong enough in the Philadelphia region to keep multifamily housing thriving.

That's the latest word from real estate investment-services firm Marcus & Millichap, whose Philadelphia office's fourth-quarter report on the rental-apartment market cites "respectable job growth and the formation of new households" as reducing vacancy rates in this region over the first nine months of 2013.

The job growth is limited, however, to fields such as health care that require academic degrees or specialized training, the report noted, while "lower-skilled workers continue to face challenges."

That may be "suppressing performance of apartment buildings on the lower rungs of the quality scale," Marcus & Millichap's report said. Yet it also noted that economic trends are pointing upward, promising an acceleration in construction of multifamily rentals in the city and the suburbs.

Nationwide, apartment construction increased in the aftermath of the recession, with the rate of homeownership down to 64 percent from its 2006 peak of 69 percent.

Lingering unemployment and stagnant incomes for millions of Americans have increased demand for rentals, which are at their lowest vacancy rates since early 2001. Late last month, the U.S. Commerce Department reported that, in October, developers received approval to build apartments at the fastest pace in five years.

Locally, multifamily rental has lagged for many years, for a variety of reasons besides the ups and downs of the economy.

For nearly a decade, beginning in 1997, many rental-apartment buildings in Center City were converted to condos to take advantage of the growing interest in city living among young professionals and empty-nesters.

The city's tax-abatement program for renovations and construction favored sales over rentals.

As the economy soured into recession and as condo sales plummeted to the point where auctions were employed to sell them, the shortage of rental units, especially at the market's higher end, was not an issue.

Also contributing: the spike in unemployment, which deterred many younger people from renting. In addition, condos and single-family homes that lingered too long on the market were turned into rentals as developers and homeowners tried to make mortgage payments.

At the end of third-quarter 2009, the metro Philadelphia apartment-vacancy rate was 6.2 percent, compared with 4.1 percent a year earlier, according to real estate consulting firm Delta Associates.

This year, however, Marcus & Millichap reported, the 2013 vacancy rate will drop to 4.9 percent, the lowest in six years.

Metro-area payrolls will increase by 33,000 jobs in 2013, Marcus & Millichap said, compared with 28,700 in 2012. The apartment-vacancy rate will likely drop in the near term as construction fails to keep pace with growing demand.

Although the number of new rental units that will be available in 2013 is almost three times the number completed in 2012, it will not keep pace with a demand many economists maintain will increase as more younger professionals and empty-nesters eschew owning for leasing.

Marcus & Millichap said 3,400 units would be added to the rental inventory this year, compared with just 1,278 in 2012.

Although the new inventory is more spread around than it used to be - in 10 of the metro area's 16 submarkets - more than one-third will be completed in Center City, the firm said. Construction began ramping up in 2011, as financing became easier.

Increased demand and continued short supply have had the obvious effects on rents, primarily at the higher end of the market, where much of the building is centered. Average rents this year will increase 2.6 percent, to $1,128 a month, Marcus & Millichap said.

Last year, the rent increase was 1.1 percent.

With the projected rent increase, Marcus & Millichap said, apartment rents will have climbed 10 percent after having bottomed out four years ago.