Multifamily Rents Up As Rate of Growth Continues to Slow

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The Editors's picture
Multifamily rents up as rate of growth slows

Multifamily rents rose slightly in April, but the rate of growth slid once again and now stands below the longterm average growth rate, according to the latest report from YardiMatrix.

 Average U.S. monthly rents rose $3 to $1,314, according to Yardi Matrix’s monthly survey of 121 markets. On a year-over-year basis, rents were up 2.0% nationwide in April, down 50 basis points from March and well below the 5.5% growth rate of a year ago.

 The 2.0% year-over-year increase is the lowest it’s been since April 2011, when rents were up only 1.5%.

“As we have said for months, the deceleration is expected, given the rapid increase in supply and the inevitable return to growth that is more in line with income gains,” YardiMatrix writes in the report. “Rents have (in most metros and most segments) far exceeded the rate of income growth in recent years, when the number of renters increased rapidly while supply nosedived in the wake of the last recession.

Multifamily rents peaking

“Now rents are peaking and have become difficult to afford for the average resident in many metros, while supply is at cyclical peaks. We expect upwards of 363,000 units to come online in 2017, with the number of deliveries declining in 2018 and 2019.

Evidence of the impact of new supply includes the difference in growth between property segments. Nationally, rents of working-class Renter-by-Necessity (RBN) properties have increased by a solid 3.3% year-over-year, while upscale Lifestyle properties have risen by only 0.7%. Roughly 80% of the new supply is in the Lifestyle segment, which is aimed at high-income Millennials and downsizing Baby Boomers, while demand in many metros is driven by middle-class renters.

Biggest impact on multifamily rents in metros with heavy apartment growth

 The biggest impact is being felt in metros that have heavy supply growth, and the effect is exacerbated when rents are above trend. Examples of the biggest differences between RBN and Lifestyle rent growth include:

  • Houston 5.3% (0.5% RBN, -4.7% Lifestyle)
  • Los Angeles 4.8% (5.8% RBN, 1.0% Lifestyle)
  • Dallas 4.4% (5.6% RBN, 1.2% Lifestyle)
  • Charlotte 4.4% (6.3% RBN, 1.9% Lifestyle)
  • Sacramento 4.2% (10.1% RBN, 5.9% Lifestyle)
  • Miami 3.9% (4.7% RBN, 0.6% Lifestyle)

Seattle and the West still lead multifamily rents

Sacramento (0.6%) once again led all markets in T-3 rent growth, and outperforming markets continue to be located in secondary cities in the Southeast and West.

That said, Mid-Atlantic metros Philadelphia and Baltimore (both 0.2%) outpaced the national average. On the other end of the spectrum, Houston and Austin (both -0.3%) continue to decline on a T-3 basis, indicating that the combination of new completions and slower economic growth remains a headwind for the multifamily industry in certain markets.

 The Twin Cities and Seattle (both 0.5%), as well as San Francisco (0.3%), had strong Lifestyle rent growth as job gains and income growth drove high-end rents forward. Conversely, RBN rent growth in Charlotte (0.6%), along with Las Vegas and Miami (both 0.5%), outperformed as renters clamored to find more affordable housing amidst growth of luxury supply.

Sacramento, Seattle and Portland lead the nation

On a trailing 12-month basis Sacramento (9.9%) led overall rent growth on a T-12 basis, as strong job growth, limited supply and relative affordability compared to the Bay Area supports the continued upward trajectory of rents.

 These areas also led the nation as steady economic fundamentals and population gains support the multifamily housing market:

  • The Inland Empire (6.9%)
  • Seattle (6.6%)
  • Portland (6.0)

Multifamily rents gains could be rocky over next 12 months

“We expect that rent gains will be rocky over the next 12 to 24 months as the market digests the wave of new supply coming online,” YardiMatrix wrote in the report.

“Apartment owners should moderate expectations during that time, even though we expect fundamentals to remain strong and the long-term demographic picture looks positive.

“Job growth remains robust and is supporting absorption of the new housing supply, although rent growth will be limited by slowly growing wages. We anticipate 2017 will be the high-water mark for apartment completions, and given the strong pent-up demand for housing, the apartment market has significant long-term upside potential, but it may be some time before we see above-trend growth again.”

Photo credit vetkit via istock.com

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