Why Multifamily Rents Are Decelerating
Year-over-year multifamily rent growth fell from 5.5 percent in 2016 to 2.3 percent in December, largely due to one thing: occupancy, reported Yardi Matrix, Santa Barbara, Calif.
“The downward trend [in rent growth] has multiple causes, including diminishing affordability, increasing supply and slightly weaker job growth that are present to one degree or another in each metro,” said Yardi Matrix Associate Director of Research Paul Fiorilla. “However, the main driver of the deceleration appears to be the extent to which supply growth has put downward pressure on occupancy rates in individual metros.”
Although occupancy rates remain high by historical levels, they have fallen 60 basis points in each of the last two years, the Yardi Matrix Bulletin report said. And with supply growth expected to hit a cycle peak later this year, “it’s a good bet that rent growth will level off or continue to decelerate in most metros for another year or two,” Fiorilla said. “Beyond that, rent increases will depend on how well developers calibrate development with demand for rental units.”
Unsurprisingly, the link between rent growth and occupancy proved strongest over the short term; the report said the correlations grow weaker past one year because developers can adjust course over longer terms when demand falls behind supply.
Multifamily fundamentals have “excelled” during the long economic expansion since the Great Recession, Fiorilla noted. Demand for rentals soared while the supply pipeline remained largely shut down–multifamily deliveries barely reached 100,000 in 2009 and 2010, one-third of the average rate.
As the economy recovered and homeownership faltered, the number of renters soared. The stabilized apartment occupancy rate reached 96.1 percent in first quarter 2016. But the occupancy rate dropped to 94.9 percent in December, the report said. “There are numerous reasons for the softening. For one thing, rents are becoming difficult to afford–particularly in the most expensive metros such as New York, San Francisco and Los Angeles–but it is also a growing problem in metros that have had sharp increases in recent years, such as Denver, Portland, San Jose and Miami. Rent growth has exceeded wage increases and rents are taking up a bigger share of personal income. And with labor slack declining, growth in employment has slowed in some metros.”
Supply growth is another challenge. New supply rose steadily to 312,000 units in 2017, Yardi Matrix said. In early 2018, 600,000 units were under construction and new deliveries could reach 360,000 units this year.
“There are several lessons we can learn,” Fiorilla said. “One is that over time a metro’s performance is based on fundamentals. Metros that are a destination for individuals and families due to healthy economic growth, job creation or even for lifestyle or climate will benefit from strong demand.”
Another lesson is that short-term trends should not be ignored, Fiorilla said. “It’s not a sure bet that once the current spate of new projects is absorbed, robust rent growth will automatically pick up again. We expect that supply growth will begin to diminish after 2018, but recent data on multifamily starts shows that deliveries might remain elevated into 2019 or beyond. What’s more, with rent growth elevated so much in recent years, the capacity to raise rents in secondary markets might be reduced.”
But the report should not be interpreted as “alarmist” in any way, Fiorilla said. “Apartment demand is expected to remain strong and new supply is needed to house the growth in population, which is increasingly tilted toward renters as opposed to homeowners. Supply is especially crucial in metros that have kept a lid on development either through over-regulation or NIMBY-ism, where rentals have become too expensive for low- and middle-income renters. In those markets, increasing the total amount of supply is the most effective solution to the affordability problem.”
