Rental Markets Cool Down in Many Large US Cities

Cities that were experiencing very strong rent growth just two or three years ago are now experiencing flat year-over-year growth and in some cases even year-over-year declines. Some of this shift can be attributed to red-hot construction volume, and some can be attributed to other factors like millennials (finally) moving into home ownership in significant numbers. From Bloomberg:

Tenants are gaining the upper hand in urban centers across the U.S. as new amenity-rich apartment buildings, constructed in response to big rent gains in previous years, are forced to fight for customers. Rents are softening most on the high end and within city limits, Terrazas said. Landlords also have been losing customers to homeownership as millennials strike out on their own, often moving to more affordable suburbs…

U.S. multifamily apartment construction for the past few years have been at levels not seen since the 1980s and rapid rent gains have also encouraged owners of single-family homes and condos to fill them with tenants. Projects opening now were conceived by developers a few years ago when rent gains in the U.S. were peaking at an annual gain of 6.6 percent, according to Zillow data.

The most expensive markets slowed first as new supply became available and tenants struggled to afford rapidly-rising lease rates. Rents in the San Francisco area jumped 19 percent in the year through July 2015. Now, they have been flat since last July. New York rents, which were up 7 percent in 2015, have been decelerating for a couple years, declining 0.4 percent in July.

The two largest metro areas in North Carolina are a part of the trend:

Source: Bloomberg

America’s Two-Tier Economy Good for Apartment Industry

The Wall Street Journal has an extensive article about America’s bifurcated economy that helps explain why the apartment sector is doing so well:

For the first time, U.S. builders last year sold slightly more homes priced above $400,000 than those below $200,000. As a result, the median price of new homes exceeded $280,000, a record in nominal terms and 2% shy of the 2006 inflation-adjusted peak.

Total sales last year, however, were up just 1% compared with 2013, and more than 50% below their average from 2000 to 2002, before the housing bubble…

Young households have been slow to buy homes because of the tough job market. Many would-be buyers can’t save enough for a down payment or don’t earn enough to qualify for a mortgage. Student debt holds others back.

A typical household, for example, would need around $60,000 in cash to make a 20% down payment on the median-priced new home in the U.S. To qualify for a mortgage, they would need good credit and to show an annual income of about $45,000, assuming little other household debt. A government-insured loan in this example could call for an $11,000 down payment but would require an annual income of $60,000…

With fewer potential customers, builders have largely abandoned the entry-level market. “If a builder can make money on something, he’ll build it. The problem is that they can’t make money at the entry level,” said John Burns, of Irvine, Calif., a consultant to builders.

But rentals, the low-end of the housing market, are booming. Apartment construction has neared its fastest pace since 1989. Two of the nation’s largest home builders, Toll Brothers Inc. and LennarCorp. , have both launched multifamily construction divisions, each with around 5,000 units in the pipeline.

This apartment sector’s performance is no secret, but as the Journal’s article points out this split in the US economy is not confined to housing. In sector after sector – cars, food, travel, etc. – sales of luxury and discount brands are booming while the sales of mid-tier brands suffer. Of course markets are cyclical, but what this data likely means is that this cycle will take a while to play itself out. Until the economic recovery expands to include the middle class, homebuilders aren’t going to be building many mid-price homes.

Again, the news looks good for apartments. At some point that will change, but it will take over-development in the apartment sector, loosened lending standards for home buyers, a construction boom in the affordable single family home sector, or some combination of these factors for the apartment industry’s fortunes to change and any of that is likely to take a while to happen.

Nationwide Apartment Supply Wave Starting to Impact Fundamentals

From an item published by CoStar Group:

New apartment completions and construction starts continue to trend upward, and the new supply of units is beginning to show up in rising vacancy rates in a number of high-growth U.S. markets…

Vacancy rates in the 54 largest markets tracked by CoStar Group remain at a 10-year low. However, the trend has clearly begun to reverse course. The national vacancy rate has risen roughly 30 basis points over the last three quarters to about 5.5% as supply has overtaken demand, and CoStar is forecasting another 50-basis-point rise in vacancies through the second half of 2014.

Translation – it isn’t happening in secondary or tertiary markets like Greensboro-High Point or Winston-Salem. It’s also restricted to high-end properties:

And while new construction for multifamily housing has picked up in recent months, analysts have also noted that demand for rental housing continues to show strength. As a result, the vacancy uptick has been restricted to Four- and Five-Star properties in markets such as Boston, Austin, Minneapolis and Washington, D.C. Vacancies in Three Star properties haven’t yet seen much movement.

“While the impact of new product will certainly trickle down to the Class B space, it hasn’t happened yet,” Yuen said.

Home Sales Lagging, Tight Credit May Be the Culprit

An article in the Wall Street Journal that explores the (still) lagging home sales market has a nugget of data that won’t surprise many apartment managers:

But price hasn’t been the only thing holding back the housing market. The Federal Reserve’s senior loan officer survey shows that as the economy has recovered, banks have been far slower to relax lending standards for mortgages than for other types of loans. In recent quarters they have actually tightened a bit.

Applying hard lessons learned during the bust, households may also be engaging in some self regulation, demanding higher down payments of themselves and more assurances that they will have the wherewithal to make payments…

It is cheering that the price and supply problems that have been holding back housing are showing signs of improvement. True recovery, though, rests on employment improving to the point that banks are more willing to extend mortgages to households and households are more willing to take them. There is hope that with the recent pickup in the job market, that time is no longer over the horizon. But it hasn’t come yet.

Until that time comes apartment managers will continue to see strong demand for their products.

WSJ: Apartment Market Rolls On

A story in the 6/25/14 Wall Street Journal focuses on the continuing strength of the apartment market as evidenced by some recent acquisitions in Denver:

The continued strength of the multifamily sales market has been a relief to many landlords who were worried the market would weaken. Rental apartment buildings were among the first types of commercial properties to rebound after the recession. But as early as 2011, some analysts were predicting the sector would cool off, fearing competition from improving home prices and the fledgling single-family rental market.

Those thunderclouds passed without a storm. The competition from the sales market has been weaker than expected largely because mortgage lending has continued to be restrictive.

Rental apartment values nationally are up 14% from the peak 2007 levels hit before the downturn, according to a Green Street Advisors index that tracks the performance of listed rental-apartment landlords. Sales volume in Denver increased 15% in the first quarter compared with a year ago, according to Real Capital Analytics Inc., a research firm.

Rents and occupancy rates also are up nationwide. In the first quarter of this year, rents rose another 0.6%—up 13% since the upswing began in 2009 —and vacancies fell to 4%, according to real-estate data firm Reis Inc.

 

Fed Worried About Tepid Housing Market

From the Wall Street Journal:

A housing slowdown that became evident late in 2013 shows few signs of reversing. Existing home sales in March fell for the seventh time in eight months and were 7.5% below the seasonally adjusted annual rate of a year earlier.

New building permits for single-family homes stood below the year-earlier level for the second straight month in March. Sales of new homes during the first quarter were 1.8% below the year-earlier level, punctuated by a 13% decline in March…

Some analysts have warned that the market’s health had been overstated by a sudden but short-lived release of pent-up demand from traditional buyers last spring, coupled with aggressive purchases by investors soaking up a glut of distressed properties.

These analysts argue that broader economic problems could hold housing back, including the failure of younger households to strike out on their own because their incomes are uneven and they have high debt loads. Continued tight credit standards have made it harder for these marginal buyers to obtain mortgages.

Once again we’re seeing indicators that favor rental housing in the near/mid-term future, which is good news for those who might be concerned that the apartment market is due for a fall.

Triad Business Journal’s Rundown of 2013 Apartment Projects

The headline says it all – Year in Review: Triad apartment market burned bright in 2013 – and it would be impossible to dispute reporter Catherine Carlock’s assertion that 2013 was a very good year for the Triad apartment market. What you might find most interesting is the list of over 20 articles the TBJ ran in 2013 about the apartment projects being proposed and built in the Triad.

Let’s hope 2014 is even better.

 

Vacancies Fell, Rents Rose Over the Summer

From an article in the Oct 1 Wall Street Journal:

The average monthly rent in the third quarter was $1,073, up 1% from the prior quarter, the largest quarterly gain in a year, according to a report to be released Tuesday by Reis Inc., a real-estate research firm. Compared with the third quarter a year ago, average monthly rent was up 3%. None of the 79 markets tracked by Reis saw rents fall.

The rental increases were stronger than industry watchers expected and represent a turnaround from the past several quarters when it appeared that rent growth was slowing, reflecting falling demand for apartments as more families decided to buy homes. But as mortgage rates jumped over the summer, following big increases in home prices, the rising cost of homeownership has priced many families out of the housing market.

However, the party won’t last forever:

But there’s another reason why some expect the rent increases to slow: a flood of new supply on the horizon. Some 170,000 new units could hit the country’s largest 54 metropolitan markets this year—about 120,000 have already been finished—followed by 190,000 in 2014 and 300,000 more units in 2015-16, according to Luis Mejia, director of multifamily research for CoStar Group, a real-estate data firm. “We see a lot of supply coming, no doubt about it,” he said. “But, younger people are renting longer than previous generations.…There is the notion that homeownership will come, but will come later in life, not as quickly as it was before the recession.”

Are Raleigh and Charlotte Apartment Markets Overbuilt?

That dirty word – overbuilt – is starting to creep into discussions about a few apartment markets around the country, including Raleigh and Charlotte:

No one is ready to utter the word “overbuilt” yet, either about Raleigh or other hot construction markets such as Austin, Texas; Charlotte, N.C.; or West Palm Beach, Fla. It’s a matter of degree, as Raleigh’s economic growth just hasn’t been as blistering as investors and developers anticipated, says Greg Willett, vice president of research and analysis for MPF Research. He notes, for example, that over the 12 months, the Triangle region that includes Raleigh has added about 10,600 jobs, which were down from the same period a year ago.

MPF estimates there are 9,626 multifamily properties under construction in Raleigh, which when completed would increase that market’s existing inventory by 7.7 percent. Looked at a different way, construction of multifamily buildings with 40 or more units in Raleigh-Durham for the years 2013 and 2014 combined will be 111.1 percent of net absorption, according to Brad Doremus, a research and economics associate with Reis Inc. Over a five-year period, Raleigh’s new apartment supply is forecasted to add 3.8 percent annually to existing inventory, according to CoStar’s PPR Multifamily.

That 3.8 percent is a hefty increase when compared to history. “To put this into perspective, the PPR54 average for supply growth is 1.2 percent,” says Francis Yuen, PPR’s real estate economist.

On the other hand:

But gauging the temperature of any market’s construction activity can be more art than science. Take Washington D.C., where MPF estimates 20,153 new apartments are under construction. When completed, those apartments would increase D.C.’s existing inventory by 3.8 percent, which Willett concedes would ostensibly signal a market out of balance. But Willett remains convinced that any overbuilding are temporary situations in both Washington and Raleigh because “they’re very attractive long-term investment markets, due to their healthy overall economies and great renter demographics.”

MPF also expects construction to cool in Austin and Charlotte (where new building activity would add 5.5 percent to inventory growth). If their current construction levels accelerate, a correction would be in order. But even if that happens, Willett sees those markets’ long-term outlooks as “very positive.”

WSJ: Rent Growth Showing Signs of Cooling Off

From the 4/3/2013 Wall Street Journal:

 The nation’s average monthly rent came in at $1,054, up 0.5% from the previous quarter and up 3.4% from the year-earlier period, marking the slowest growth rate since the end of 2011, according to a report to be released Wednesday by Reis Inc., a real-estate research firm. The national vacancy rate, which hit 8% in the aftermath of the financial crisis, fell to 4.3% from 4.5% in the fourth quarter.

Landlords have profited in recent years amid a combination of stable supply as few new apartments were built and solid demand from consumers unable or unwilling to buy homes. Rental rates have climbed more than 9% since bottoming in late 2009…

Industry watchers are increasingly concerned that the multifamily apartment sector may have peaked. “There’s not a lot of room to keep pushing rents right now,” said Ryan Severino, a Reis senior economist. “It’s becoming unsustainable.”