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AXIO Market Madness: Semifinals and Final

Four Apartment Markets; One Champion

By Carl Whitaker | Friday, March 31, 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.

To review the whole tournament, click to read about the Round of 64, Round of 32, Round of 16 and Round of 8.

Click here to download the bracket.


 

As North Carolina, South Carolina, Gonzaga and Oregon compete for basketball glory, the apartment markets of Palm Bay, Colorado Springs, Fort Worth and Reno are vying for the rent growth championship. Here’s how the semifinals and finals played out.

Semifinal Game 1

It only seems fitting that a city named Palm Bay would breeze by the competition, and that has certainly been the case in our Market Madness. The market’s 10.5% annual effective rent growth has been a tall order to match so far, and even Colorado Springs’ impressive 8.1% falls well short of the eastern Florida city.

We discussed in a previous post the drivers behind the remarkable rent growth in both Colorado Springs and Palm Bay. Unsurprisingly, the combination of vigorous job growth and a relative lack of new supply largely fuel this prosperous period.

In Palm Bay’s case, we discussed the reverse seasonality of the market. Generally speaking, markets tend to see the lowest rent growth totals in the winter months (i.e. the fourth quarter). Markets such as Palm Bay, though, get a boost from in-migration. It’s no secret that people enjoy warm and sunny weather, and Palm Bay’s generally temperate climate draws warm-weather seekers, ultimately boosting in rent growth.

Rent growth in Palm Bay is not as heavily tied to job growth as it is elsewhere, but strong job growth still drives rent growth in the metro. Palm Bay has had impressive rent growth for some time, thanks in part to this strong job growth.

 
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Steadily increasing job growth has also helped push occupancy rates up, especially with the relative lack of new supply entering the market (only 1,200 units delivered since 2010). The long-term average occupancy (dating back to 1998) is 92.0% - low by most conventional definitions. But occupancy has increased to a healthy 96.0% as of February 2017.


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Palm Bay’s 10.5% annual rent growth proves too much for a stout Colorado Springs, and Palm Bay will advance to the championship round.

 

Semifinal Game 2

Fort Worth and Reno may surprise some readers as national semifinalists. It is safe to say that Fort Worth is the weakest of the semifinalists, although 5.4% rent growth is nothing to scoff at. Fort Worth’s path to the semis, though, was far easier than the other regional champions (for example, Fort Worth would not have advanced past the second round in the West region).

The semantics of regional seeding aside, it is important to analyze what has driven Fort Worth rent growth.

Annual job growth was 2.2% in 2016, a full 50 basis points above its long-term average. Particularly strong growth in Education and Health Services (3.9% growth, increasing to 133,600 employees) and Leisure and Hospitality (5.2% growth, up to 112,700 employees) helped fortify these healthy job growth totals.

 



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While Dallas has received a lot of attention for its high construction totals, Fort Worth has been a relatively quiet market, adding 14,500 units since 2010 (an inventory growth of 8.8%, slightly over half of Dallas’). This relative lack of development has helped push up rent growth levels.

Occupancy in Fort Worth also has been strong. Although February 2017 occupancy slipped 24 bps from February 2016, most metros nationwide have recorded declining occupancy. In fact, 83 of the Axio Top 120 MSAs have lower February 2017 occupancy rates than in February 2016, so a 24-bps drop is more of a hiccup than cause for concern. Occupancy in Fort Worth is actually the best among major Texas metros, and comfortably above the national occupancy rate.

 

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For one last comparison between Fort Worth and Dallas, Fort Worth has exhibited stronger annual rent growth for 20 straight months. The following map shows the Fort Worth MSA boundary (bound by the blue box) as of February 2017. While some submarkets in Fort Worth are experiencing rent growth in the 2%-4% range, this compares favorably to Dallas, where many areas (most notably the urban core area) are seeing rent growth below 2%.

 

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 For all the talk of Fort Worth and its merits however, it is Reno that advances to the championship matchup, as the 12.2% rent growth is just too much for the steady engine that Fort Worth has been. Reno will advance to the final and face Palm Bay.

 

Championship Matchup

The Big Dance finally comes to a conclusion and features Reno, the No. 8 seed in the West, against Palm Bay, the top seed in the East.

In the 86 months since January 2010, Palm Bay would have beaten Reno 56 times on a monthly head-to-head basis (or 65% of the time). But sometimes it is all about getting hot at the right time – think South Carolina beating Duke – and Reno has managed to do that. In our grand finale, it is Reno’s 12.2% annual rent growth that tops Palm Bay’s 10.5% rent growth.



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To go down with 10.5% rent growth is no easy pill to swallow, though the amazing rent growth in the area should be enough to console Palm Bay apartment owners and operators.

Reno’s 12.2% annual effective rent growth is nothing short of astonishing, and a far cry from the -9.7% recorded in February 2010 (although virtually every market in the nation was experiencing negative rent growth back then).

So, what is driving this phenomenal growth in Reno? We discussed back in September how Reno has been faring compared to the rest of the market. In that write-up, we explored how Reno was able to get such incredible rent growth totals (in fact the rent growth in August was 15.7%, so the market has actually slowed by 380 bps).

Right now, Reno’s growth is all about jobs, jobs, jobs. The market had 3.7% job growth in 2016 -- a full 260 bps above its long-term average. Amazingly this 3.7% is actually down from 4.3% the previous year (which shows how rent growth has “moderated” from 15.7% in August 2016 to 12.2% in February 2017.)

What types of jobs are being added? Unsurprisingly given the metro’s overall growth, the Construction sector has excelled, with 5.3% job growth as of January 2017. Leading the pack, though, is Manufacturing with a robust 6.6% growth rate. Finally, as one would expect with a city steeped in tourism, the Leisure and Hospitality sector continues to add jobs, with 5.7% growth as of January 2017.

New supply has been relatively low during this prosperous period, which in turn helps rent growth. An average of 326 units were delivered annually from 2010-2016. It will be interesting to keep an eye on the metro in 2017, though. Axiometrics has identified 1,271 units to deliver in 2017, meaning there will be almost four times the number of units delivering this year than the average from the preceding seven years.

 


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Reno’s performance throughout 2017 has no bearing on our tournament, however, which means the “Biggest Little City in the World” can now lay claim to its “One Shining Moment” – the 2017 Axio Market Madness title.

Carl Whitaker

Carl Whitaker

Real Estate Analyst

Carl Whitaker is a Real Estate Analyst for Axiometrics.

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