Apartment Market Momentum Slowing

The apartment market may have lost some momentum this year, but rents continue to increase, sector analysts say.

Wells Fargo Securities, Charlotte, N.C., reported demand for rentals “softened somewhat” compared to last year’s fairly robust pace. “[Also,] net completions have slowed to their slowest pace since 2016, an indication new apartment construction likely peaked in 2018,” the firm’s Apartment Market Outlook commentary said.

Apartment property price appreciation has also moderated, Wells Fargo Securities noted. “The double-digit price gains registered throughout the majority of the expansion have now cooled to a below-9 percent pace this year, reflecting growing caution from investors,” the report said. “That’s not to say the apartment market is about to fall off a cliff. Even with softer tenant demand, landlords appear to have no trouble raising rents.”

Research firm Yardi Matrix, Santa Barbara, Calif., said multifamily rent growth inched upward in October as the average U.S. multifamily rent increased one dollar to $1,476 per month. Year-over-year rent growth remained at 3.2 percent.

Apartment rents increased 0.1 percent nationally on a trailing three-month basis, which compares the last three months to the previous three months, Yardi Matrix reported. Southern and Western markets increased the fastest, while tech markets including San Jose, Seattle, Boston and San Francisco slowed the most.

“With the high competition for top tech talent in these markets, there seems to be a correlation with rapidly growing rents in the summer, when recent graduates are moving and finding their first job, followed by a significant seasonal slowdown,” Yardi Matrix said.

Wells Fargo Securities said the national apartment vacancy rate recently fell to 5.8 percent, equaling the cycle low hit in 2014.
“The still-solid yet more moderate demand for apartments is also to be expected given that overall economic growth is slowing,” Wells Fargo Securities said. Real GDP growth has moderated recently to a sub-2 percent pace roughly equal to the past decade’s average. “Hiring appears to have lost some steam recently, and since demand for apartments closely follows job growth, it is not all that surprising that net absorption has also moderated this year. Lower mortgage rates and generally more favorable home-buying conditions have also likely persuaded some renters to pursue homeownership, a move some undoubtedly delayed last year due to higher borrowing costs.”