Axiometrics: ‘Stability’ in Multifamily Market

Stability remains the apartment market’s key theme as November’s 2.3 percent annual rent growth held close to October’s 2.1 percent increase, reported Axiometrics, Dallas.

November’s rent growth also matched the long-term average and was essentially the same as seen a year ago, the Axiometrics November  Market Trends report said.

“Such stability is not surprising, given that many of the same trends remain in place–namely, record levels of new supply coming as job growth is flattening in an economy near full employment,” the report said.

Axiometrics noted apartment occupancy typically declines from October to November. While November’s 94.6 percent occupancy rate was 6 basis points lower than a year ago, the October-to-November decline of just 13 basis points was the lowest seen for that period since the Great Recession ended.

“A decline in occupancy was expected, given that the fourth quarter of the year is a seasonally slow leasing period and that massive amounts of new supply are being delivered this quarter,” the report said. “However, a slower pace of decline than in previous years reflects the underlying stability of the market.”

Apartments have historically been a good investment compared to other real estate property types and other investment vehicles–and they remain a good place for investors, Axiometrics said. It examined various property types using average annual total returns and average volatility using the Sharpe Ratio, which compares an investment’s excess return over the risk-free rate to its standard deviation of returns. The higher a fund’s Sharpe Ratio, the better an investment’s returns have been relative to its risk.

Axiometrics found apartments have historically outperformed industrial properties and are “well above” office properties and hotels, yielding higher average total returns and less risk. Apartments trail only the retail sector for volatility as measured by the Sharpe Ratio.

Compared to other investment options, apartment returns outperformed bonds and Treasury Bills that had somewhat higher risk. Apartment returns remain far below S&P 500 and NAREIT Equity Real Estate Investment Trust index average returns, but these alternative investments come with much higher risk volatility, the report said.

“One of the advantages of apartment properties over other real estate types is the relatively short-term nature of apartment leases that allows owners and managers to adjust rents for changing market and economic conditions quickly,” the report said. “This flexibility and the larger number of leases–one for each unit–compared to other commercial real estate types provides some cushion for tenant churn and provides a more stable cash flow.”