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AXIO Market Madness: Round of 64

The Tournament Tips Off

By Carl Whitaker | Wednesday, March 15, 2017

 

In this series of blogs, Axiometrics has compiled a “Field of 64” in the spirit of the annual NCAA Division I basketball tournaments.

Each of the top 64 metros was ranked based on their cumulative rent growth from 2010-2016 and is represented by a total percent growth over that time. The 2010-2016 effective rent levels represent the market’s annual average rent for each of those years. Each of the metros was assigned a geographic region, similar to the NCAA tournament itself, respective to its best-corresponding region.

The individual matchups themselves take into account annual effective rent growth as of February 2017. The metro with the highest annual effective rent growth in February 2017 will go on to the next round, eventually crowning an apartment market bracket champion.

The format below includes the metro’s seed in parentheses (1 to 16) and the metro’s name, followed by its annual effective rent growth. Example: (7) Dallas, TX – 3.2% rent growth.

Download a printable bracket here. 


 

North Region

The North Region is our most geographically expansive, stretching from Detroit to Salt Lake City.  Major metros within the region include Chicago, Minneapolis and top-seed Denver.

Denver is the clear favorite based on cumulative rent growth, with a 49.7% increase from 2010 ($925 rental rate) to 2016 ($1,384), followed by neighboring Boulder’s 40.0% increase ($1,087 in 2010 to $1,522 in 2016).

In the true spirit of our Apartment Market Madness, the North Region is particularly interesting because of the large number of quintessential college towns in the region. Boulder (University of Colorado), Ann Arbor (University of Michigan), Madison (University of Wisconsin), and Lansing-East Lansing (Michigan State University) are all home to some of the nation’s largest and most recognizable colleges. Michigan, Wisconsin and Michigan State are all in the actual basketball Big Dance.

Both Boulder and Denver have cooled off considerably from their 2015 high points, making the North Region a total toss-up. Denver survives its first matchup with Milwaukee, but Boulder loses to 15th- ranked Minneapolis – the first major upset of the tournament.

Class A performance in Denver is worth discussing further because of its rejuvenation over the past three months. In November 2016, Class A effective rent growth was struggling to reach 1.0%, and was the lowest of the three asset classes in the metro. Class A began rebounding in December 2016, and has recovered remarkably well relative to other asset classes, jumping up to 4.5% in February 2017. Recovery of this Class A product is indicative of slowing new supply, which bodes well for the metro.

 
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South Region

Containing the likes of Dallas, Austin, Atlanta, Houston, and Phoenix, the South Region features some heavy-hitters in terms of apartment market size. However, a smaller market (Naples, FL, with 62.8% cumulative rent growth) takes the No. 1 seed among these giants. Think of Naples as Gonzaga.

The sheer number of Florida and Texas markets in the region is a testament to the strength of the apartment market in these states. Although metro-level performance may differ (for instance, compare annual performance in Dallas to Houston), the fact is Texas and Florida have the second and fifth fastest growing populations in the nation, respectively. Job growth also has increased -- and when population plus jobs expand in an area, apartment markets respond positively.

A 16 seed over a 1 has never happened in the NCAA men’s tournament, but it’s happening here. Gainesville’s 4.3% annual effective rent growth in February proves too much for its in-state competition Naples, which posted 3.1% rent growth. No. 14 Tampa toppling nearby third- seed North Port is another major regional upset.

So, what happened between Naples and Gainesville? The fact of the matter is at almost any point in the past six years Naples would have been victorious. The market was bound to experience some moderation though, as effective rent growth levels as high as 16.3% are not sustainable for long periods of time. That moderation began to occur in Naples rather abruptly in the summer of 2016, although February 2017 rent growth looks better than it has for a few months.


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The matchup between fourth-seed Austin versus 13th-seed Corpus Christi is notable because the two are experiencing an exceptionally slow rent-growth period. Austin’s 0.6% rent growth in February limps across the finish line, comfortably beating Corpus Christi’s -4.2%. 

One of our featured matchups of the first round is No. 7 Dallas versus No. 10 Phoenix. Phoenix takes home the victory, with 4.4% rent growth to Dallas’ 3.2%. The trends for rent growth in Phoenix and Dallas have been similar over the past year. Both markets have maintained healthy rent growth, but have also moderated somewhat from their early 2016 performance. Like many other markets, this can be attributed to a combination of slowing job growth and elevated supply levels.

 

East Region

The East Region has the smallest variance of the four regions, with the spread between top-ranked Palm Bay (39.0% cumulative rent growth) and 16th-ranked Wilmington, DE (20.4%) a meager 18.6 percentage points.



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For comparison, the difference between No. 3 Miami and No. 14 Columbus (OH) is less than 10%. The variance for those same seeds in the other three regions are 18.5%, 17.1% and 29.6%.

Such a small spread may lead some to believe the region is the weakest in the field. Palm Bay’s impressive performance in recent months, though, makes the metro a dark horse (or as “dark horse” as a No. 1 seed can be).

New York jumps out as a notable exclusion from the region, but the metro’s 17.5% cumulative rent growth was not enough to make the cut, bringing up shades of the 2007 – or even 2017 -- Syracuse Orange team that was also a notable selection snub. Now, if we were also doing an apartment market NIT, New York would be among the favorites to reach the final four on its Madison Square Garden home court.

The East Region has a clear favorite in Palm Bay, which easily advances over 16 seed Wilmington, DE. The 12 seed knocking off the 5 seed has been a fairly common occurrence in recent tournaments, and our bracket has a similar upset, with No. 12 Durham sending No. 5 West Palm Beach home early.

Not many 14 over 3 seed upsets have happened in the tournament, but we do have one in the East Region, with Columbus (2.5% rent growth) defeating Miami (1.9%).

 

West Region

The West Region is unsurprisingly saturated with California markets. San Francisco Bay Area markets exhibited incredible cumulative rent growth numbers, with Oakland (63.0%), San Francisco (59.2%), and San Jose (58.0%) garnering the one, two and three seeds for the region, respectively.

A testament to the region’s strength, Seattle (which is in the midst of phenomenal performance) is only the region’s sixth seed. By comparison Seattle would be the second seed in the North and East regions, and the third seed in the South.



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The West Region should be an interesting play because the markets have cooled off significantly in 2016. This may play out similarly to the big teams getting cold at the wrong time, a la Michigan State and West Virginia in the 2016 basketball tournament.

As predicted, the West Region is a slugfest, with very strong rent growth throughout. We have another unprecedented 16-over-1 upset, as Tacoma (8.6% February rent growth) makes easy work of Oakland (-0.3%). The silver lining for Oakland in this case is, however, appears to at least be stabilizing rather than slipping further.



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Another one of our featured matchups – No. 2 San Francisco versus No. 15 Los Angeles (which would be like Duke facing Kentucky in the first round) – is an expected outcome for readers, as Los Angeles’ 2.5% rent growth beats San Francisco’s -0.5%.

Apartment market performance in San Francisco is extremely sensitive to changes in job growth, and slowing job growth there throughout 2016 dragged the market’s performance down significantly. Los Angeles, on the other hand, is less sensitive to these changes, though the metro has moderated from its strong 2015.

 


Round 1 Results



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Carl Whitaker

Carl Whitaker

Real Estate Analyst

Carl Whitaker is a Real Estate Analyst for Axiometrics.

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