The apartment market produced steady, solid results throughout 2012. While many MSAs moderated from peak rent growth levels achieved during the summer of 2011, national effective rent growth still averaged a healthy 3.85% over 2012. Also in 2012, the occupancy rate averaged 94.2%, as compared to an average of 93.9% in 2011. Because of seasonality, the December rates are lower than the full-year average, but not by much. Annual effective rent growth was 3.72% in December while the occupancy rate was 94.1%.
For 2013, Axiometrics is forecasting effective rent growth of 3.6% at the national level. While the overall growth is forecasted to be relatively the same as 2012, effective rent growth is forecasted to improve in some MSAs while moderating in others. In addition, the national average occupancy rate for stabilized product is forecasted to rise in 2013 to an average rate of 94.9%. For the national average to achieve that occupancy rate, Class C properties will need to build on the momentum they generated during 2012. The main factors in the validity of the forecasts are continued job growth, acceptance of rent increases by consumers for a fourth consecutive year, and absorption of new supply.
Speaking of new supply, the last section of this newsletter provides an overview of Axiometrics’ latest pipeline coverage. Almost 164,000 units are scheduled for delivery in 2013, nearly double the 2012 delivery total. While close to 150 MSAs will see new units delivered in 2013, almost one-third of the nation’s deliveries will be concentrated in just six MSAs: Washington, DC; Dallas; New York; Seattle; Austin; and Houston. Stay tuned for upcoming newsletters detailing how well the new supply is being absorbed. In the meantime, Axiometrics Pipeline clients can access the full list of planned and under construction properties, delivery schedules by property and MSA, and the performance of lease up properties by logging into our website.
Jay Denton | Vice President, Research
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Effective Rent Growth
Nationally, annual effective rent growth finished the year at 3.72% in December. The annual growth rate remained in a steady range between 3.60% and 3.84% over the last seven months of the year. The annual growth rate during the recovery peaked at the national level in July 2011 at 5.32% and moderated to a rate close to 4.00% by the end of 2011. Axiometrics forecasts 3.6% annual effective rent growth for 2013.
While the REITs are a small portion of our national dataset, many clients like to use their results for benchmarking purposes. After dipping to an annual effective growth rate of 4.18% in July, the REIT dataset improved and finished the year with 4.73% effective rent growth in December. The REITs maintained an average annual growth rate above 6.00% for most months between October 2010 and July 2011. Since then, the REITs have maintained an average annual growth rate close to 4.60%. Axiometrics forecasts average annual effective rent growth of 4.1% for the apartment REITs in 2013. Individual portfolios range from 3.7% to 5.2%, largely because of differences in geography and property characteristics. Axiometrics forecasts effective rent growth at the property level, and it is then aggregated by submarket, MSA, and portfolio.
Asking Rents and Concessions
Nationally, annual asking rent growth finished the year at 2.36% in December. While Axiometrics tracks asking rent growth, effective rent growth is our main focus because it matches closest with actual revenue growth. The following table shows some of the MSAs with the largest spreads between annual asking and effective rent growth for December 2012. The perceived performance of these MSAs can be very different depending on which type of rent is being measured.
Concession values lowered the asking rent 2.16% at the national level in December, which is the equivalent of 7.9 days free on a 12-month lease. For comparison, the concession value lowered asking rents 3.47% last year and 5.20% two years ago.
Nationally, the occupancy rate peaked at 94.57% in September before declining to 94.11% to end the year. The occupancy rate typically declines in the fourth quarter each year because of normal seasonality. In 2011, the national average occupancy rate declined from a peak of 94.27% in August to 93.63% in December. This year was the first time the national occupancy rate finished the year above 94.0% since 2006.
Asset Class Performance in 2012
Class C properties finished the year with the most improved effective rent growth rate. Compared to December 2011, annual effective rent growth improved from 3.4% to 4.3% for Class C properties. Class B properties maintained a fairly consistent growth rate over the same period, improving slightly from 3.8% to 3.9%. Annual effective rent growth slowed throughout 2012 for Class A properties, which finished 2011 with 4.9% annual effective rent growth but slipped to a rate of 3.4% by the end of 2012.
Class A properties continued to maintain the highest occupancy rate of the three classes. However, while December is a seasonally slow period in which occupancy typically declines, the 94.9% occupancy rate for Class A properties was the first time the group averaged less than 95.0% at the national level since February 2011. In previous newsletters I have mentioned the need to monitor the performance of Class A properties closely for any impact from new supply. A question to be answered is whether a significant trend is developing with annual effective rent growth slowing and the occupancy rate dropping below 95.0%, or whether the decline can simply be attributed to seasonality. The trends early in 2013 should provide more clarity on this issue.
Much like the improvement in effective rent growth, Class C properties experienced the most improvement in occupancy rate of the three asset classes during 2012. Occupancy growth is somewhat of an unfair comparison because Class C properties had much more room to improve than the other two classes, but the improvement is noteworthy nonetheless. Class C properties had an average occupancy rate in December greater than 94.0% in 42 of the top 88 MSAs. That was only true for nine MSAs three years ago while the apartment market was at its trough.
Top and Bottom Performing MSAs in 2012
Effective rent growth remained very strong in many MSAs across the nation during 2012. While annual growth rates have moderated for most MSAs over the past 18 months, 40 of the top 88 MSAs had an annual effective rent growth rate of 4.0% or better in December 2012. Even with the normal seasonal decline, 57 MSAs also had an occupancy rate above 94% to close the year. The following table displays the top 5 and bottom 5 MSAs for annual effective rent growth rates, along with other notable MSAs, across the country.
At the end of 2012, Axiometrics was actively tracking close to 1.4 million market rate apartment units in the construction pipeline across 328 MSAs and 833 submarkets. More than 1.0 million of those units were somewhere in the planning stage, from early conceptual drawings to late in the permitting process. As of late-December, there were 226,674 units under construction that had not yet begun leasing. There were 120,067 units in lease up, of which 40,369 units were at properties where construction had not yet finished. Please note that these figures are only focusing on market rate apartment units tracked by Axiometrics, which are typically 40 units and larger. Also, these statistics do not include the student, senior, affordable, or condo properties, which Axiometrics is also tracking.
New construction continued to increase in 2012, which will translate into more deliveries in 2013. Close to 164,000 units are scheduled to deliver over the next four quarters, or almost double the approximately 86,000 units delivered in 2012.
While close to 150 MSAs will see new units delivered in 2013, almost one-third of the nation’s deliveries will be concentrated in six MSAs: Washington, DC; Dallas; New York; Seattle; Austin; and Houston.