The apartment market continued to post positive results in February 2013. Annual effective rent growth was 3.53% and the occupancy rate increased 35 basis points (bps) from a year ago. While rent growth has remained steady the pace has been gradually slowing. February’s annual effective rent growth was the lowest since August 2010.
Breaking the results down by asset class points out a number of differences: slowing growth rates for Class A, steady growth rates for Class B, and improving growth rates for Class C. Annual effective rent growth for Class A properties slowed to 3.2% at the national level in February 2013, after peaking at 5.9% in June 2011. In San Francisco, one of the previous hottest Metropolitan Statistical Areas (MSAs) in the country, Class A annual rent growth actually turned negative, at -2.5%. More details on the San Francisco MSA can be found at the end of the newsletter.
Concession values have been falling dramatically over the last three years, and I have included a map showing how the usage of very large concessions has decreased across the country. In December 2009, there were more than 2,300 properties offering an average concession value of at least two months free on a 12-month lease. As of February 2013, that number had shrunk to just 335 properties.
In next month’s newsletter, I will take a deeper dive into the apartment pipeline. I will provide details on MSA and submarket delivery schedules, absorption rates and concession values for lease up properties, and more.
Effective Rent Growth
Nationally, annual effective rent growth declined from 3.62% in January to 3.53% in February. The annual growth rate was 3.96% a year ago. The growth rate has slowed in nine of the last 10 months as many MSAs are moderating from very strong rent growth the previous three years. The peak annual growth rate at the national level was 5.32% in July 2011.
Seventeen of the top 88 MSAs had an annual growth rate greater than 5.0%, including Oakland (7.3%), Houston (6.7%), Denver (6.1%), Seattle (5.3%), and New York (5.1%). Only two MSAs had a negative annual growth rate: Tucson (-1.52%) and Albuquerque (-0.11%). More details on top and bottom performing MSAs can be found at the end of this newsletter.
Asking Rents and Concessions
Nationally, annual asking rent growth increased from 2.25% in January to 2.34% in February. The annual growth rate was 2.18% a year ago. While Axiometrics tracks asking rent growth, effective rent growth is our main focus because it matches closest with actual revenue growth.
Concession values lowered the asking rent 1.90% at the national level in February, which is the equivalent of 6.9 days of free rent on a 12-month lease. For comparison, the concession value lowered asking rents 3.09% last year and 4.62% two years ago. The peak for concession value was in December 2009 when asking rents were lowered 7.47% by the use of concessions.
While the average concession value at the national level never eclipsed one month free on a 12-month lease during the downturn, there were many individual properties offering double that rate. Approximately 2,300 of the properties Axio surveyed in December 2009 were offering a concession of at least two months free on a 12-month lease. That number dropped to 335 properties in February 2013.
The following maps illustrate how the use of very large concessions has declined over the past three years. Some MSAs, such as Denver, have no properties reporting two months free today, but the story was quite different a few years ago. While MSAs in the Midwest still have some properties offering large concession values, the number has been cut back dramatically as apartment market conditions continue to improve in those areas.
Most major MSAs still have a handful of properties offering at least two months free, but 67% of those properties are concentrated in the Class B- to C- range. In the Axiometrics database, only 28 properties graded between class A- and A++ are offering an average of 2 months free or more.
It is important to note that Axiometrics collects concession values at the floor plan level, and a property’s overall concession value is based on the weighted average of each floor plan based on the unit mix of the property. For example, if a property is offering two months free on some floor plans, but a lower value on other floor plans, it would not be included in this group because its overall average would be less than two months free. In addition to general improvements in the apartment market, which has resulted in lower concession values, it is important to remember that there are some slight seasonality differences to be considered when comparing a result in December to one in February.
While practically all MSAs have seen a decline in concession values, I circled a few areas on the maps as examples.
Properties Offering More Than Two Months Free on a 12-month Lease
Nationally, the occupancy rate increased 8 bps from 94.05% in January to 94.13% in February. This rate is up 35 bps from February 2012 and 71 bps from February 2011. The latest Axio forecast projected the national average occupancy rate to reach 94.9% in 2013.
Currently, 28 of the top 88 MSAs have an average occupancy rate greater than 95.0%. Interestingly, three of the MSAs in the top 10 for occupancy rate are in Florida, a state that still has a lot of dots on the concession value map. Of course, none of those dots are in the MSAs of Miami, Naples, or Sarasota. The dots in Southeast Florida are in West Palm Beach.
Asset Class Performance
At the national level, Class C properties continued to post the best annual effective rent and occupancy growth rates in February 2013. Annual effective rent growth for Class A properties declined from 4.9% in February 2012 to 3.2% in February 2013. While Class A and C properties have been on opposite growth paths the past year, Class B properties have been very stable, with annual effective rent growth staying close to 3.6%.
Top and Bottom Performing MSA's
The following table lists some of the top and bottom performing MSAs across the country. Houston, Denver, Oakland, San Jose, Charlotte, and Seattle continue to rank in the top tier for revenue growth. Boston and San Francisco, two MSAs that consistently ranked in the top tier for revenue growth the past two years, recently dipped below the national average for revenue growth.
Source: Axiometrics Inc.
The following chart shows that Boston’s revenue growth softened during the final quarter of 2012 and has settled at a rate below 3.0%. San Francisco’s slowdown is more pronounced as it has fallen from a peak of 15.9% last February to 2.9% this February. While a combined two-year growth rate of close to 20% is extremely impressive, the recent slowdown helps answer the question, “How long can the MSA push effective rents at such a torrid pace?”
Class A properties have slowed the most in San Francisco. In fact, the level of rent in February was 2.5% less than a year ago. The annual rent growth rate for Class B properties has been moderating as well, with 5.9% growth this February compared to 14.7% a year ago. In contrast, Class C properties continued to maintain a double-digit growth pace through February with annual growth of 12.1%, though the peak was 18.4% last August.
The following table breaks down the effective rent levels in San Francisco by class since December 2009, which is a common date we use for comparisons because it was the trough for effective rents at the national level. The level of effective rent for Class C properties in February was up 35.0% compared to December 2009. Class A properties still show the best absolute growth as effective rents were up $690 from the trough, but rents have fallen $234 per unit since the middle of last summer. It should be noted there are seasonal differences to consider when comparing rents in February to rents in July, but Class A properties have not had a similar seasonal fall off the past few years. It is now evident that the bulge in the level of rent last summer was not sustainable. We will shortly see if rents start growing again as the market heads into prime leasing season.
Could new deliveries be impacting the rent growth of Class A properties in San Francisco? The Axiometrics pipeline delivery schedule showed 671 units delivered in the San Francisco MSA in 2012. For this year, deliveries jump to 2,374 units with 682 units being delivered in the first quarter. Almost half of the first-quarter deliveries will be in the San Mateo submarket.
The South of Market submarket, which has the highest average effective rent of the San Francisco submarkets ($3,341), will deliver approximately 1,237 units in 2013, but only about 250 units will be delivered in the first half of the year. Even though the bulk of the deliveries do not occur until later in the year, those properties begin pre-leasing well in advance of the first move-in date. A 22-story, 417-unit building, 1190 Mission at Trinity Place, was already leasing in February even though first move-ins are not expected until July.
Note that the pipeline properties tracked by Axio are typically 50 units and larger. The properties used for this pipeline analysis are all market rate properties, but a percentage of the units will typically be assigned for lower income residents in an MSA like San Francisco. Also note that Oakland is split from San Francisco in Axio reporting.