The pleasantly surprising apartment market strength in April and May foreshadowed an excellent second quarter of 2014. Effective rent growth in the quarter was the strongest since the third quarter of 2000, according to Axiometrics early release numbers.
In other words, the last time rent growth was this strong, “hanging chads in Florida” was not yet in the vernacular. And occupancy in the second quarter of 2014 was higher than any quarter since George W. Bush’s first inauguration: the first quarter of 2001.
Effective rent growth was 2.4% on a quarterly basis nationwide in April-June 2014, the highest quarter-to-quarter rate since the 2.9% of July-September 2000. Occupancy in the second quarter of 2014 was 95.0%, the strongest since the 95.6% of January-March 2001.
Both rent growth and occupancy exceeded expectations.
Effective rent growth was soft in January and February, perhaps because of the major winter storms and bitter cold temperatures that gripped much of the nation during the early part of this year. But March, April and May was one of the strongest three-month stretches we’ve seen in the 19 years Axiometrics has been tracking apartments.
The second-quarter effective rent growth was a big improvement from the first-quarter’s 0.5%, which itself was an increase from the -0.9% recorded in the fourth quarter of 2013, measured on a quarter-over-quarter basis. Occupancy was up 60 basis points from the first quarter’s 94.4%, ending a two-quarter streak of decline.
Annualized effective rent growth was 3.3% in the April-June 2014 time frame, up from 2.9% in the January-March period. That matches the second-quarter 2013 rate and marks the second straight quarter in which the annualized effective rent growth has increased.
These increases are taking place with 180,000 new units having been delivered in the past year.
Though some may be perplexed that the apartment market is so strong even though more new supply is being delivered this year than any year since before the Great Recession, the fact is that this new supply is being absorbed by people who might otherwise be in homes. U.S. Census Bureau statistics show that the home-ownership rate in the first quarter of 2014 was 64.8%, the lowest in 19 years – since the second quarter of 1995, when the rate was 64.7%.
So that, along with the increasing choice to rent rather than own, continue to play in the favor of apartments.
More supply is on the way, but the apartment market is merely returning to a more “normal” level of construction. Total residential construction, including single-family homes, is still well below the historical norm. This prolonged period of lower-than-normal residential construction allowed apartment occupancy rates to surge to a level not achieved since 2001.
The second-quarter strength is further confirmation that, as Axiometrics reported previously, the rental base is changing. Most of the new units are geared toward higher-income individuals.
Most of these high-rent submarkets are in the urban core, where millennials and others like to be closer to their work and play. Also, many in this age cohort like the flexibility of renting versus owning, while others might be falling victim to stringent mortgage-lending requirements.
But renters outside the core are staying put, and they, too, might not quite make the mortgage-qualification standards because of credit and/or income issues.
The 25 top Metropolitan Statistical Areas or Metropolitan Districts – among Axiometrics’ top 50 markets with the most apartments – by quarterly effective rent growth for the second quarter of 2014 were:
The top 25 markets on an annualized effective rent growth basis, among the top 50 markets:
The top 25 markets for occupancy among Axiometrics' top 50: