Apartment Sector Slows
The apartment sector stumbled during the first quarter as occupancy backtracked and rent growth continued to flatten, said RealPage, Richardson, Texas.
“While some loss of apartment market performance momentum is normal when cold weather in much of the country discourages household mobility, the occupancy downturn in early 2018 is pronounced,” said RealPage Chief Economist Greg Willett. “With so much new supply coming on stream, even a short period of sluggish demand can do some real damage. It’s difficult to maintain pricing power in such a competitive leasing environment.”
Willett said the current 94.5 percent occupancy rate represents “more normal” conditions after an unusually tight apartment market between in 2012 and 2017. Occupancy averaged 95 percent in that six-year period, peaking at 95.6 percent in mid-2016. “However, current occupancy matches the long-term average registered over the past 25 years,” he said.
Among larger markets, Minneapolis-St. Paul remained atop the occupancy leaderboard in the first quarter with 96.5 percent of existing stock full in March, RealPage reported. Occupancy also reached 96 percent or higher in New York, Newark-Jersey City, N.J., Orlando, Fla. and Sacramento, Calif.
Despite the quarterly slump, apartment rents rose in March, Yardi Matrix reported. “Average U.S. rents increased by $4, which has to be a relief to an industry wondering whether the positive growth cycle has run its course–or if it hasn’t, then how much steam is left,” the firm’s Multifamily Monthly report said.
Rents have decelerated since peaking at a 5.4 percent year-over-year growth rate in early 2016, Yardi Matrix said. “With mounting concerns over peaking supply, declining occupancy rates and affordability issues in many metros, it is natural to wonder whether flattening growth since last summer was a natural seasonal pattern or if rents would remain flat for an extended period,” the report said, adding nearly 620,000 units have been added to the apartment stock nationwide over the last two years, resulting in a 100-basis-point occupancy drop.
“The next few months will be telling, however,” Yardi Matrix said. “Rent growth in the first quarter was weak compared to the first quarter of recent years. Gains averaged 1.0 percent in the first quarter of the last three years. We would expect growth to continue over the next quarter, though. And we expect it to remain concentrated in metros with migrating jobs and population.”
Willett said while apartment demand was sluggish in the first quarter, robust job growth over the past few months could lead to new household formation and more apartment demand during the upcoming prime leasing season. “However, near-term deliveries also will be aggressive, suggesting limited prospects for much upturn in occupancy and rent growth,” he said.
