Wells Fargo Securities: Multifamily Rent Growth Moderates

Apartment rent growth is slowing–especially in once-robust markets–and will likely return to a more normal rate in the quarters to come, said Wells Fargo Securities, Charlotte, N.C.

“With [multifamily] completions set to peak this year, rent growth should level off around its long-run average,” said Wells Fargo Senior Economist Anika Khan.

CoStar, Washington, D.C., reported apartment asking rent growth reached a record 5.5 percent nationwide in early 2015. But as supply increased and demand cooled slightly, activity grew just 2.4 percent in the first quarter, matching the year-over-year pace seen nearly five years ago.

“Rental rate growth in nearly all markets moderated in the first quarter,” Khan said in a Wells Fargo Securities commentary, Supply Wave Pulling Apartment Rent Growth Lower.

Khan noted much of the asking rent growth deceleration comes from “moderating” activity in once-robust markets including Portland, Ore. and California’s East Bay area. “We also find energy-intensive markets like Houston and Oklahoma City losing ground in recent quarters,” she said.

For example, a year ago Portland asking rents saw the fastest growth in the nation as technology-intensive submarkets contributed to low vacancy rates and solid rent growth. But Costar reported cumulative completions now exceeded the previous cycle’s high. Portland’s year-over-year rent growth fell from its 11.4 percent peak to its current 3.3 percent.

East Bay rent growth also exceeded 10 percent annually at the cycle peak due to the market’s proximity to technology markets such as San Francisco and San Jose and favorable demographics, but increasing deliveries dropped rent growth to 2.2 percent currently.

New apartment deliveries could peak this year, Khan said. “The wave of supply is evidenced in the level of housing starts with five or more units, which reached a peak in mid-2015,” she said. “With the average start to completion timeline around four to six quarters, it’s not surprising to see the large number of completions this year.”

Starts and permits have also moderated and are approaching their long-run average, Khan said. As a result, given the expected slower pace of completions, “overall asking rent growth should also stabilize near its long-run average, which is around 2 percent,” she said.