Apartment Rent Growth Slowing

Multifamily rent increases will likely slow down and oversupply may negatively impact some locales, but most metros will continue to enjoy positive fundamentals, said Yardi Matrix, Santa Barbara, Calif.

Demand for apartment units will remain strong, even if growing supply pushes occupancy rates down slightly, Yardi Matrix said.

“The slowdown in rent growth from frothy 2015 levels should persist,” Yardi Matrix’s Multifamily Outlook report said. “Deceleration will be pronounced in metros that had unsustainable double-digit increases and those where supply, affordability issues or weakening employment growth will put pressure on rent gains.”

But Yardi Matrix said it expects national rent increases to approach 4 percent, above the historical trend of 2.3 percent and “a signal that the market is healthy overall,” the report said.

Axiometrics, Dallas, examined 10 metro areas with the highest annual job gains between December 2014 and December 2016 and their corresponding effective rent growth. All 10 added fewer new jobs in 2016 than in 2014.

“Perennial leaders, including New York, Dallas, Atlanta and Los Angeles, are joined by Boston, Denver and Riverside (Calif.), which continue to be strong job generators,” said Axiometrics Real Estate Economist Chuck Ehmann. “Phoenix and Chicago are producing fewer new jobs in 2016.”

Ehmann said Houston’s job growth fell the most, dropping by nearly 360 basis points, while six of the remaining nine fell by at least 100 basis points. Dallas and Boston’s job growth dropped an average of 54 basis points on average while Los Angeles slipped by only 4 basis points.

“As you would expect given the high correlation between job growth and effective rent growth, almost all of these top 10 metros experienced reduced rent growth in 2016 compared to 2014,” Ehmann said. The report said December rent growth turned negative in New York and Houston, falling more than 500 basis points in each.

Yardi Matrix noted that the capital markets have been “friendly” to the sector for years and predicted that will likely continue, “although cracks may start to appear,” the report said.

“Multifamily is still generally viewed as a safe investment with good prospects, but some investors are beginning to hold back due to concerns about interest rate increases when acquisition yields are at historical lows,” Yardi Matrix said. “The debt markets remain stable, although GSE reform is looming in the background.”

Rents began decelerating nationally in second-half 2016. Yardi Matrix said it expects that trend to continue. “One reason is the mismatch between demand and supply, which is already producing a slowdown in high-rent markets such as San Francisco, Denver and Austin,” the report said. “Each of those metros has a strong economy and an attractive lifestyle that continue to drive in-migration. But all saw severe rent deceleration in the second half of 2016, as rent levels have surpassed what many tenants can afford.”