No Signs of Slowing Multifamily Rent Growth
The multifamily market does not appear to be slowing, and a tight labor market could extend its run, analysts said.
The national average rent rose $2 in February to $1,426.reported Yardi Matrix, Santa Barbara, Calif. Year-over-year multifamily rent growth reached its highest figure since late 2016.
Rent growth has increased steadily since reaching bottom at 2.2 percent in fall 2017, the Yardi Matrix Multifamily National Report said. “The consistent growth is a sign of the strength of the sector’s fundamentals and an indication that the cycle has a ways to run,” the report said.
The cycle’s “staying power” represents a major concern in a market that has had an unusually long run without a downturn, Yardi said. “Multifamily, however, continues to defy those worries, and the latest numbers are evidence that the market has strength to perform well for a while, even if the economy or other commercial real estate segments slow down.”
Marcus & Millichap, Calabasas, Calif., said declining “underemployment” is supporting apartment demand at the moment. “The tight labor market is helping those who have had a difficult time finding a job in the past attain new opportunities,” the firm said in a Research Brief, noting February’s 80 basis point drop in the broad-based underemployment rate represented the largest single-month decline in the measure’s history.
The underemployment rate tracks discouraged individuals who have not looked for work in recent months and part-time employees seeking full-time positions.
“As more of these [underemployed] workers find full-time employment, new households will form, boosting demand for apartments,” Marcus & Millichap said. “Class C units in particular will benefit as they offer inexpensive housing options.”
Class C monthly rates have appreciated 33 percent over the past 10 years, less than Class A and B rent growth. The Class C apartment vacancy rate fell to 4.1 percent at year-end 2018, its lowest level since 2000, Marcus & Millichap said. “In general, the unemployment rate and the Class C vacancy rate have tended to move together over time,” the report said. “This poses a risk for investors should the economy lose substantial momentum.”
Multifamily rent growth peaked in 2016 in the mid-5 percent range, Yardi said. “The growth made sense coming on the heels of a housing supply gap–demand rose sharply as the economy recovered, while new supply of all housing (single- and multifamily) dropped by more than half coming out of the financial crisis.” Rents then slowed for more than a year to just 2.2 percent in late 2017 as supply and demand came more into balance, the report said.
“The market is just about to enter the part of the year where most of the annual rent growth typically occurs,” Yardi said. “All signs point to this year being no different. Occupancy rates have ticked down slightly, but absorption has been no problem.”
