Great Article from MPF on Apartment markets
Reprint from MPF
MPF Research Reports Western Region Metros Lead U.S. Apartment Rent Growth to New Highs for the Cycle
New resident pricing jumps 5.9 percent, while occupancy tightens to 96.1 percent
(September 30, 2015) — The pace of rent growth pace continues to accelerate in U.S. apartments, according to MPF Research, the rental market intelligence division of RealPage, Inc. (NASDAQ: RP). Annual growth in effective rents for new residents reached 5.9 percent in the third quarter 2015. That annual growth included a price increase of 2.2 percent, occurring July through September. The only time annual rent growth for new leases proved stronger was during the Tech Boom expansion of 1999-2000.
Additional Gains in Renewal Lease Pricing
Renewal leases executed in the third quarter were priced 5.4 percent above previous rates. Renewal pricing is important for apartment owners and operators, as more residents are staying put – rather than moving – when their leases expire. In the third quarter, 51.1 percent of households with expiring apartment leases chose to renew. Retention rates have been climbing steadily over the last five years, though they are very seasonal, peaking in the winter months when cold weather discourages moving.
“Sizable rent growth for both new resident leases and renewal leases speaks to the apartment sector’s overall health,” said RealPage chief economist Greg Willett. “Job growth is strong enough to spur meaningful new household formation, and the net demand level for apartments is also helped by the limited number of households leaving the rental market to make first-time home purchases.”
While apartment rents are rising at a significant pace all across the country, the nation’s average price increase is being skewed quite a bit by the surging rents in the western region of the country. Annual new resident rent growth is at 8.4 percent in the West, compared to 4.7 percent in the South, 4.5 percent in the Northeast, and 3.6 percent in the Midwest. Furthermore, the pace of rent growth is now accelerating more quickly in the West than other parts of the country.
| Annual Rent Growth for New Residents by Region Year Ending in the Third Quarter 2015 | ||
| Leaders in Annual Rent Growth for New Residents Year Ending in the Third Quarter 2015 | ||
| Rank | Metro | Rent Growth |
| 1 | Portland | 14.3% |
| 2 | Oakland | 12.1% |
| 3 | San Francisco | 11.7% |
| 4 | Denver-Boulder | 10.1% |
| 5 | Sacramento | 9.9% |
| 6 | San Jose | 9.7% |
| 7 | San Diego | 8.6% |
| 8 (tie) | Atlanta | 8.3% |
| 8 (tie) | Seattle-Tacoma | 8.3% |
| 10 | Nashville | 7.9% |
| 11 | Phoenix | 7.6% |
| 12 (tie) | Charlotte | 7.3% |
| 12 (tie) | Fort Worth | 7.3% |
| 14 (tie) | Los Angeles | 7.0% |
| 14 (tie) | Orlando | 7.0% |
Tight Occupancy, Strong Demand and Sustained Construction
Sizable rent growth in U.S. apartments reflects tighter occupancy. The occupancy figure as of the third quarter was 96.1 percent, up slightly from 95.8 percent a year earlier.
Demand for apartments across the nation’s 100 largest markets came in at 85,689 units during the third quarter, surpassing concurrent deliveries that totaled 69,299 units. Demand in the 12 months ending in September registered at 260,430 units, ahead of the 236,606 new units completed.
Properties under construction in the 100 largest metros at the end of the third quarter totaled 436,407 units. That construction volume is on par with the average for the past 10 quarters, reflecting no meaningful change in building activity.
“While new supply tends to slow rent growth historically, that hasn’t been the case as of late,” Willett said. “Construction of luxury units in the most desirable neighborhoods results in new product rents that are too high to pull many residents out of the existing stock. Nationally, the typical monthly rent for new communities is around $1,600, more than 15 percent above typical rents in the best properties built prior to 2010.”
MPF Research forecasts that U.S. apartments will remain essentially full through 2016. “While overall occupancy should inch down very slightly, that slight shift really just reflects the volume of product moving through initial lease-up, rather than any real softening in the performances of most individual existing communities,” Willett said.
Rents will likely continue to rise, but at a slower pace than is seen now. “MPF Research expects annual rent growth for new leases to remain above 4 percent through the end of 2016,” Willett said. “Whether or not the western region metros can sustain their torrid price increases is the key question. While underlying fundamentals are very strong in the West, if the economy experiences an unforeseen stumble, there is perhaps greater risk of a price correction there.”