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Effective Rent Growth Stability a Surprise

Supply Reaching Plateau, Not Peak

By Louis Rosenthal | Monday, June 26, 2017

Toppling expectations, national annual effective rent growth has yet to fall below 2% this year. At the macro level, rent growth has stabilized following a sharp moderating trend that began in September 2015. Since the start of 2017, national rent growth has fallen between 2.1% and 2.3% (with May coming in at 2.2%), according to Axiometrics apartment market research.

Meanwhile, job growth and occupancy rates are slowing, but neither represent a death knell for the apartment market.

For many observers in the industry, the real threat to the health of the apartment market is the extent of new supply still in the pipeline. A common question we hear is, when will new apartment supply reach its cycle peak?

New Supply and Forecast

While it’s true that 2017 will likely feature the most new units delivered this cycle (though early 2018 is now looking more likely), the Axiometrics new supply forecast shows less of a peak and more of a “plateau.”  A true peak occurred back in 2006 and 2007, when roughly 350,000 new units were built nationally (nearly 40,000 units fewer than what we expect for 2017). In the five years following the peak, new supply averaged about 198,000 new units per year. By comparison, we expect new supply to average about 320,000 new units per year after 2017, according to the apartment market data.  

Permitting Trends

Further alleviating fears about overbuilding is the rate of national residential permitting, which is right around where we were back in the early 1990s and early 1980s. Problematic permitting levels occurred in the mid-2000s, with disastrous results. The current climate is nowhere near this extreme.

At the macro level, then, new supply is manageable. The same applies at the market level, with most metro areas building a sustainable level of new apartments given job growth trends. It’s at the submarket-level where new supply can be problematic, particularly in urban core areas.

For example, consider the case of Seattle’s urban core, a remarkably durable submarket given the incredible amount of new apartments delivering. The following images demonstrate the competitive pressure facing a single stabilized asset from new properties in lease-up, under construction or in the planning phase.

Seattle Urban Core Impact

Importantly, this ignores the competitive pressure from other stabilized assets. It remains to be seen how well Seattle will absorb all of the new units scheduled for completion this year and next, particularly if the current streak of strong job growth ends abruptly.

In sum, national effective rent growth is holding steady in the low-2% range, which may be surprising to some observers, especially those who view new supply levels as a significant threat in the near term. New supply levels may be problematic, but not at the national level and not across most major apartment markets. The real concern should be at the micro level: individual submarkets—particularly urban cores—are exposed to a very high level of competition from new supply and existing assets.  



Louis Rosenthal

Louis Rosenthal

Real Estate Analyst

Louis Rosenthal researches and analyzes current apartment trends in the United States and correlates them with economic indicators. He also studies the urban landscape and other metrics to develop in-depth reports and presentations for clients. Louis recently earned his Master of Science in Public Policy, focusing on housing, landuse patterns, real-estate dynamics and economic development. He combines that knowledge with his four years of practical experience in tax analysis, regression analysis and presentations to develop insightful analysis. An accomplished writer, Louis’ work has appeared on and Axiometrics’ blogs, among others.

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