Originally posted on Multifamily Executive January 9, 2018
Rents grew 2.5% in 2017, which, although solid, represents the smallest annual increase since 2010, when rents fell 0.4%, according to Yardi Matrix. Since then, rents had grown by at least 3.3% every year, peaking at 5.4% in 2015 and declining to 3.4% in 2016.
In December, rents remained at $1,359, according to Yardi Matrix’s monthly survey of 121 markets.
December’s year-over-year 2.5% increase was up 20 basis points over the previous month, and overall rents are $4 off their all-time high of $1,363, which was achieved in September 2017. Rents were down 0.3% in the fourth quarter, which is only the second negative quarter of growth nationally since the second quarter of 2010 (rents also fell 0.2% in the fourth quarter of 2016). “Although the results are somewhat negative compared to recent history, what’s notable is how consistently strongly the market has performed during the entire recovery,” Yardi says in its report.
So what do these numbers mean moving forward?
“Our view is that growth will continue at roughly the same rate nationally, led by strong demand,” Yardi states. “The economy shows no signs of slowing down, as GDP comes off two strong quarters and should get at least a boost from lower corporate and personal tax rates, while job growth continues to impress. Combined with the growth of the young adult population, household formation should remain robust.”
On the metro and submarket levels, secondary markets such as Sacramento, Calif.; Orlando, Fla.; Las Vegas; Salt Lake City; and Colorado Springs, Colo.—with affordable rents and growing populations—should see above-trend increases, Yardi notes. “Business-friendly markets such as Dallas and Atlanta should see a slowdown in rent increases, but see moderate gains nonetheless, while expensive coastal markets such as New York City and markets with excessive supply growth are likely to see little or no gains,” according to the data provider.
Sacramento (9.1%) continued to be the fastest-growing market on a trailing 12-month basis (T-12) in December, outpacing the second-ranked Inland Empire (Calif.) by 400 basis points. Other strong markets were generally concentrated in the South and West, with Seattle (4.9%) and Las Vegas and Orlando (both at 4.7%) showing significant rent increases. The Mid-Atlantic and Texas had the slowest-growing rents, with the weakest-performing T-12 markets being Houston (-1.0%); Austin, Texas (0.5%); Washington, D.C. (1.0%); and Baltimore (1.2%).
While T-12 data only begin to capture 2017’s supply levels, the numbers show that significant high-end supply has had a decelerating effect.
Apartment supply will reach a cyclical peak of roughly 300,000 units in 2017 and, with 600,000 units under construction, is expected to grow by another 20% in 2018, according to Yardi. Nationally, the occupancy rate of stabilized properties has declined 40 basis points year over year and stood at 95.3% as of November.
Yardi says its data show that supply growth is having an impact on rent growth, although deliveries aren’t even across metros, and neither is demand.
Nashville, Tenn., saw the biggest decline in occupancy rates, falling 130 basis points, to 94.8% (as of November), while rent growth in the Music City dropped to 0.5% in December 2017, from 5.2% a year earlier. Nashville added 5.7% to multifamily stock during that time, the biggest percentage increase among major U.S. metros.
Here’s more from Yardi on occupancy-rate drops:
Miami and San Antonio round out the top three in occupancy declines, each falling 100 basis points year over year. Miami’s occupancy rate stood at 94.9%, with year-over-year rent growth dropping to 1.3% as of December, from 3.1% a year earlier. At 93%, San Antonio has the lowest occupancy rate among major metros, and rent growth dipped to 0.8% in December, from 2.9% a year earlier.
Other metros with above-average declines in occupancy rates include Seattle and Orange County, Calif. (-0.9%); Dallas and Portland, Ore. (-0.7%); and the Inland Empire; Raleigh, N.C.; San Francisco; Chicago; Washington, D.C.; and Austin (-0.6%). During that time, those metros either have been mired in weak rent growth (Washington and Chicago) or have seen precipitous declines (such as Seattle, Portland, and Austin).
Heavy supply growth has caused the occupancy of stabilized properties to drop 50 basis points over the past six months, according to Yardi. Looking ahead, with deliveries expected to reach a cyclical peak of 360,000 in 2018, Yardi forecasts the occupancy rate to continue its downward trajectory this year.