Apartment demand still runs high

The Scotsman Guide - Victor Whitman - 11 January 2017

As has been reported in the Wall Street Journal and other media recently, landlords of luxury apartments in major U.S. cities are having a harder time finding tenants and leasing up new buildings. Thousands of new apartments have opened in Manhattan and other major metros. Rents are no longer rising as fast. In a few markets, landlords are offering concessions, such as free parking or rent for up to three months.

All this is true about the upper end of a few U.S. markets, analysts told Scotsman Guide News. This also presents a distorted picture about the overall multifamily market, however. 

From the point of view of landlords, the apartment sector’s key market fundamentals — the projected rents over the next few years and vacancy rates — still look strong.  

Conversely, renters are still facing rising rents in most cities and, in many markets, affordability challenges.

In New York City, rents fell in the third quarter by 0.5 percent and by 1 percent in San Francisco, according to Reis Inc. Rents in those cities, however, remain the highest in the country — $3,425 a month in New York and $2,472 a month in San Francisco at the end of the past third quarter, according to Reis.

In most cities, however, rents are still going up, although a widespread apartment-building boom is starting to slow down rental growth and push up vacancy rates. In the third quarter, rents rose in 77 out of 82 markets, Reis said. In the previous quarter, rents rose in all 82 metros that the company tracks. 

In the third quarter, the national vacancy rate was hovering around a still-low 4.4 percent, which was identical for the same quarter a year earlier. However, vacancy rates climbed marginally as 2016 came to a close. 

“There is overbuilding in almost every metropolitan area that we track, but it is not so dire that vacancies are going to spike,” Barbara Denham, an economist for Reis, told Scotsman Guide News. “They [vacancies] have started to go up, but only a few percentage points. It is not like this huge oversupply and huge vacancy rate at all. It is just a small uptick.”

Nick Fitzpatrick, a real estate analyst at Axiometrics, described a multifamily market returning to a more normal level in 2017 after a period of exceptional rent growth and historically low vacancies. Axiometrics projects that apartment construction will peak in 2017 at roughly 370,000 new units. Just under 300,000 new units were delivered in 2016, he said.

Fitzpatrick said the national rental growth rate in December was at 2.15 percent annually, which is just a hair below the historic average of 2.2 percent.

“The year itself averaged out to right around 3.3 percent,” Fitzpatrick said. “Looking at 2014 and 2015, we were seeing rent growth well into the 5 percent range, which on the national level presents a tremendous amount of growth.”

Axiometrics is forecasting that rental growth will begin to accelerate again in 2018 and 2019 as apartment construction tails off. Fitzpatrick noted that the job numbers have been solid, and the demographics favor multifamily. The huge millennial generation (young adults in their 20s and early 30s) are projected to keep demand high for apartments.

“We think that 2017 will be a bit of a down year and then into 2018 and 2019 we expect rent growth to come back,” Fitzpatrick said. “We do expect healthy growth in the apartment market, partly because we do expect to see supply ramp down a little bit.”