Tuesday, April 10, 2012

How apartment rents and vacancies can rise (or fall) simultaneously

We at the Lusk Center put out the Casden Forecast for apartment economics in Southern California every spring.  When we put out our San Diego numbers last week, we presented a result that confused people--we expect both rents and vacancies to rise in the next year.

The reason this can (and often does) happen is that real estate markets operate with lags, and feature "natural" rates of vacancy.  The "natural" rate is the rate at which real rents stay constant--if vacancies fall below the natural rate, real rents rise; if they rise above, rents fall.  Stuart Gabriel and Frank Nothaft did a nice paper on this some time ago.

Consider a tinker toy model of rents that is characterized by two equations (the ts in parentheses are subscripts for time):

Vac(t) = Vac(t-1)+(Rent(t-1)-1)*.05


Rent(t) = Rent(t-1)-(Vac(t-1)-.05)*Rent(t-1)

So when rents fall below $1, absorption picks up, otherwise it falls; the natural vacancy rate (the rate at which real rents rise or fall) is 5 percent.  This produces the following picture of rents and vacancies:

As one can see, this simple model shows periods where rents and vacancies rise and fall together.

Of course, this is all in real terms.  When there is inflation, nominal rents can rise even when the vacancy rate is above the natural rate, because rising nominal rents are masking real falling rents.  


gmb said...

Do you know where I can find San Diego's historical apartment rates and vacancies?

Unknown said...

Nowadays,the apartments and vaccancies were rises simultaneously due to the growth of population.
then i want to find san diego's historical apartments rates and vaccancies.

Dave Lindahl

Unknown said...

Apartments For Rent In Makkah, Alkhateeb will advertise your property for sale, apartments for rent, property to rent. Get best deal at best prices.

Apartments for Rent in Makkah

Madrid Spain Apartments said...

Good thinking post
Accommodation Rental Spain.

Apartmentkharkov said...

This is really informative and helpful too in finding kharkiv ukraine apartments for rent.

Unknown said...

I love the way you explain the topic with us you will see the expertise on this fields. Thanks for sharing! Vancouver debt consolidation

orientalbeautyspa said...

Oriental Beauty Escorts in Malaysia provide sexy and beautiful Asian model in escort services and massage in KL, Malaysia. People's choice awards in best Malaysia escort. For more information please Visit: best escort

Madrid Spain Apartments said...

With so many people who have lost their homes, millions are practically out on the street. The economy is at an all time low, and with more people than apartments, no doubt it is tough trying to find a place to live. If you research for a good rental service company, and do your homework, you can find the best next place to live. Although it seems impossible trying to rent the perfect apartment for your family, it isn't difficult at all.

Rent Apartment Constanta

Unknown said...

Demand for apartments around the country continue to push vacancies lower, though rising rents are making it more difficult for renters to find affordable apartments.

Boston Corporate Housing

Unknown said...

There are many factor which is affect to apartment rent rates. luxury suite leasing appears to get more and more complex as distinct types of rentals come on the market.

Ottawa furnished apartment rental