Builder expectations for market-rate apartment units improved in the fourth quarter, as developers forecast growing demand for rentals following the condo construction and conversion exuberance of recent years, the National Association of Home Builders (NAHB) reported.

According to the latest results of the NAHB’s Multifamily Rental Market Index (MRMI), the index level reflecting builder expectations for market-rate rental starts is 69.5 — nearly 18 points higher than 2005’s fourth-quarter index. The scale for this index is from 0 to 100, with a rating of 50 generally indicating that the number of positive responses is about the same as the number of negative responses.

“We are forecasting that the rental and for-sale sectors of the multifamily market will rebalance during the next two years, with about one-third of multifamily starts representing condos and nearly two-thirds representing rentals by the end of 2007,” said David Seiders, NAHB’s chief economist, in a statement. “Last year, the for-sale market had grown to represent nearly half of all multifamily starts, a record share, and a correction now is underway.”

Builders expect a slightly higher level of low-rent starts as well, perhaps reflecting the improved congressional climate for funding affordable housing.

The occupancy components of the MRMI are still strong, standing at 59.2 during the fourth quarter for luxury (class A) apartments, 55.1 for moderately priced (class B) and 58.6 for lower-rent (class C) apartments. The occupancy components for better-quality apartments were down slightly on a year-over-year basis, possibly reflecting increases in supply, due to recent conversions to rentals from the condo market. Respondents report that the rental vacancy rates are up, rental units are remaining empty for longer periods of time, and rents have dropped slightly since late 2005.
When asked about their expectations for rental occupancy over the next six months, multifamily builders and developers expressed optimism, posting MRMI index numbers of 68.4, 64.1 and 65.3 for class A, B and C apartments, respectively. The volume of calls from prospective renters rose from a fourth-quarter-2005 level of 54 to a level of 58.8 in the fourth quarter of 2006.

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