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Apartment demand keeps climbing

Manhattan apartment buildings
Fotog | Getty Images
Manhattan apartment buildings

Despite recovery in the single-family housing market, demand for apartments continues to surge. Just 4 percent of U.S. apartments nationwide were vacant in the second quarter of this year, according to a new report from Reis. That pushed rents up 3 percent from a year ago.

"The simple fact that vacancy continues to compress despite such low vacancy rates speaks volumes about the ongoing demand for apartments," said Ryan Severino, senior economist at Reis. "The national vacancy rate now stands 380 basis points below the cyclical peak of 8 percent observed right after the recession concluded in late 2009."

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As a result, construction is surging ahead, with 34,834 units completed during the quarter, the highest level in four years and up from 21,237 a year ago. This large surge in new apartment product will meet head on with strong demand, and is therefore unlikely to cause any easing in rents.

Rents are still rising, but not as fast as might be expected given the supply constraints. The culprit: weak income growth.

"Landlords would like to raise rents faster, but most tenants simply can't afford to pay more right now," said Severino.

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While single-family home prices are recovering, and sales are picking up, younger Americans are still cash-strapped and some lack the credit scores to qualify for a home loan. That has left more of them renting. Household formation is increasing, but not nearly as quickly as some had predicted.

On a local level, New Haven, Conn., and Syracuse, N.Y., had the lowest vacancy rates at 2 and 2.1 percent, respectively. Both markets are home to major universities.

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The lowest vacancy rates are concentrated in East and West coast markets, according to Reis, where home prices are the highest and new construction is constrained.

By CNBC's Diana Olick. Follow her on Twitter @Diana_Olick.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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