According to this article in the Wall Street Journal, industry analysts expect slower rent growth for apartments across the US in 2019. A key factor is that more units are expected to come online this year than we’ve seen in any year for three decades. From the article:
Developers are slated to complete another 319,000 new units in 2019, up from last year’s still-aggressive figure of 287,000 units. That is the largest influx of new apartment supply in roughly three decades.
Filling those units could be particularly challenging if the economy begins to slow as expected.
“We certainly saw we can handle that [much supply] as long as the economy is producing 200,000 jobs a month, but that’s realistically not the expectation for next year,” said Greg Willett, RealPage’s chief economist.
As has been true for the last ten years, the pace of construction in the Piedmont Triad has lagged that of most of the country, including our neighbors in Raleigh and Charlotte, so this market may not see the same slow down that’s anticipated for other markets.
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:
According to REIS the vacancy rate nationwide scootched up a tad in the first quarter of 2018, but so did rents. All in all the market has cooled, but not as much as some analysts feared due to the boom in construction. From the Wall Street Journal:
The apartment vacancy rate edged up to 4.7% in the first quarter, up from 4.6% in the fourth quarter of 2017, according to data released by Reis Inc. on Tuesday. The vacancy rate jumped from 4.3% a year earlier, while the average apartment rent grew 3.9%, Reis said.
By both measures, the market has cooled from the recent peak, when rent growth hit 5.8% in 2015 and the vacancy rate touched a low of 4.1% in the third quarter of 2016.
Still, the market has proved to be resilient, given a flood of new supply from developers hoping to cash in from the strong growth rate earlier in the recovery. A sharp slowdown in occupancy and rent growth hasn’t materialized…
Nearly 59,000 units per quarter were added in 2017, compared to the historical average of around 34,000 units per quarter.
The author of the article also points out that the new tax law, which reduced the tax benefit of owning versus renting, might have reduced the number of people actively pursuing homeownership.
Due to fewer deliveries of new product, and a tight housing market, have stabilized the nation-wide rent and vacancy rates, and new data shows that there is reason to believe the trend will continue. From the National Apartment Association:
After a stagnant first quarter performance, most metro markets saw modest rent growth and stabilized vacancy rates in the second quarter. The national rent growth rate has also stabilized, measuring 3.6 percent annually, according to RealPage. The Western markets of Sacramento, Seattle and Riverside-San Bernardino led the way. Unlike previous quarters, the San Francisco Bay Area has finally begun to show signs of recovery, with the San Francisco, San Jose and Oakland submarkets all posting increases above 1.0 percent. Houston, however, continues to experience rent decreases, although the rate of decline has begun to abate as the energy slump slowly dissipates.
While an onslaught of new construction dampened occupancy rates in fourth quarter 2016 and early 2017, conditions improved during the second quarter. Data from RealPage indicated national demand for more than 175,000 units, far exceeding the 86,431 units completed. Nevertheless, the market is still working through the glut of apartments from the two previous quarters, with occupancy now sitting at a still-healthy 95 percent. This is down slightly from the 95.3 percent a year prior.
Outlook Looking ahead into the remainder of 2017, a tight for-sale housing inventory coupled with rising mortgage interest rates may sideline more potential homebuyers, thereby buoying apartment demand. This could help support healthy rental demand in the traditionally more-expensive Northeast and West Coast markets. The slowing in multifamily starts at the national level is good news for markets overloaded with luxury product, but puts further pressure on the highly-sought-after Class B/C sector.
After losing several of his best players, Oakland A’s general manager Billy Beane in 2002 took a gamble when he enlisted replacements that were relatively unknown but statistically had a strong chance of hitting it out of the ballpark, so to speak. Beane’s hunch about his new players proved true when the A’s managed to stay competitive and financially healthy with this new lineup.
Predictive analysis works in a similar fashion. It analyzes trends and data related to the behavior of apartment shoppers to recommend pricing on apartment properties. A number of factors such as rent and occupancy rates go into this formula. “It’s probably the frontier for revenue management going forward,” according to Rich Hughes, head of data science with RealPage Inc., which conducts this type of analysis.
This method of analyzing tenant behavior to determine pricing may be especially useful in assessing certain risks associated with short-term leases.
Demand for apartments is even stronger than experts anticipated. Younger Millennials in their early-to-mid-20s still make up the biggest block of new renters. But older Millennial renters in their early-to-mid-30s are staying in their rental apartments longer—even after they have coupled up and had children.
“There are a lot more toddlers in apartments today than was the case a few years ago … traditionally, those in that age segment have tended to leave the apartment market for single-family housing,” says Willet. “That young urban family segment is becoming more and more important to the apartment industry’s health.”
So how good is the US apartment market right now? Very good indeed:
New resident rents rose 5.2 percent over the 12 months that ended in the second quarter. That’s the biggest rent hike since 1999-2000, according to the latest data from MPF Research, based in Carrollton, Texas.
Obviously it’s not just families with toddlers that are responsible for the good times. The article explores many of the factors that are contributing to the good times – including construction delays that are helping prevent a glut of new units coming on line all at once – and it’s definitely worth a read.
Rent rates are up nationwide, but rents in some major metro areas can make those of us in other areas of the country gape in awe. Check out this map of the median rent for 1 bedroom apartments in New York City:
National apartment occupancy reached 95% for the first time in at least six years in May 2014, according to research from Axiometrics, the leader in apartment data and research.
Additionally, effective rent growth for the year to date ending in May was 3.7%, the highest growth since the trough of the recession. With both improving occupancy and rent growth despite increasing unit deliveries, the apartment market is performing at a very high level.
“Axiometrics began tracking apartment data on a monthly basis in April 2008, and this is the first time since then that occupancy has been 95%,” said Stephanie McCleskey, Axiometrics’ Director of Research in a press release. “We tracked quarterly before that, and the second quarter of 2001 was the last time the market was at 95% for a quarter. It’s a pleasant surprise because it’s coming at a time when new supply is flooding the market.”
According to Axiometrics’ recently released May 2014 Market Trends Report, May saw a 20 basis-point (bps) increase in occupancy from the 94.8% recorded in April 2014, also the previous monthly high. Occupancy was 94.8% in August and September 2013.
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.
Axiometrics Inc., the leading provider of apartment data and market research, reports that at the national level annual effective rent growth slowed to 3.2% in the second quarter of 2013. For comparison, annual effective rent growth in the second quarter of 2012 measured 4.0%. Further, Axiometrics’ data indicates that the effective rent growth rate has slowed for eight consecutive quarters as many Metropolitan Statistical Areas (MSAs) are decelerating from very strong growth the previous three years. Peak annual rent growth at the national level during this current cycle was 5.3% in July 2011…
While the national growth rate has been slowly decelerating over the past eight quarters, it should also be noted that the current growth rate is still above the long-term average of 2.1%.
Occupancy at the national level remained strong, measuring 94.7% in the second quarter of 2013. A year ago the occupancy rate stood at 94.3%. The improvement in occupancy has occurred despite an increasing wave of new apartment supply.