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Performance in Top Apartment REIT Submarkets

Supply Affecting Rent Growth

By Carl Whitaker | Tuesday, May 16, 2017

 

Conversations in the apartment industry have focused on new supply for some time now, and rightfully so, considering the 372,000 units expected for 2017 delivery is the highest total since Axiometrics started tracking the industry in 1996. Apartment REITs are a big part of the equation.

With new supply, it is important to consider not only the overall amount, but also where it is being delivered at a hyperlocal level.

Consider this – if you are an operator and new properties enter your neighborhood, this increases competition in your area. As new properties tend to offer concessions to further entice potential residents, this will likely affect rent growth performance at your property (for example, your stabilized property may have to offer concessions to compete with new product).

Apartment REITs have been seeing this recently. While performance can vastly differ on a property-to-property basis, the general trend is that REIT performance has been affected. To help highlight this impact, Axiometrics has provided an analysis on a few major REIT apartment markets and the impact of new apartment supply in a few select submarkets.

Dallas

More than 3,000 new units were delivered to the Oaklawn submarket in 2016 resulting in an impressive annual inventory growth of 12.0%, according to Axiometrics’ apartment market data. This large of an increase in such a short time helps illustrate why the submarket has experienced negative annual rent growth early in 2017. As of April, annual rent growth is -0.63% in the Oaklawn submarket

The Oaklawn submarket has a heavy concentration of REIT properties, with more than 4,000 REIT units. This wave of new supply has caused performance among REIT-owned properties to slip to -0.29% as of April 2017.

Fortunately for the greater Dallas area, job growth has continued to be phenomenal (annual growth of 4.1% in 1Q17). This strong, sustained job growth likely means that although annual rent growth in the Oaklawn submarket is currently negative due to elevated supply levels, the outlook beyond 2017 is positive.


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San Francisco Bay Area

The San Francisco Bay Area has been brought up time and time again because of its apartment market’s slowing rent growth which is the byproduct of decelerating job growth, new supply and unaffordability. The San Francisco Bay Area is notorious for its sensitivity to changes in job growth as highlighted by the following example.

In 2016, roughly 1,500 units were delivered in the Northeast San Jose submarket, compared to 2,500 units in 2015. Conventional thinking would suggest that, all things equal, such a large drop in new units would result in improved performance.

But even as supply significantly pulled back in the Northeast San Jose submarket, the market-wide slowdown in annual job growth from 3.9% in 2015 to 2.7% in 2016 resulted in an incredible 900 bps drop in annual rent growth in 2016, the apartment data shows.

Supply in the Northeast San Jose submarket has been swollen for some time now however, so the impact of new supply on an area should not be discounted. Annual job growth of 2.7% in 2016 was still an admirable 150 bps above its long-term average, so the continuously high level of new supply in the metro is partially to blame for slowing rent growth.

The good news is the San Jose market has improved in early 2017, up to 1.48% in April 2017 – an improvement of 380 bps from December 2016. REIT-owned properties in the Northeast San Jose submarket have shown improving performance as well, achieving annual rent growth of 2.02% as of April 2017.


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Atlanta

A barrage of new supply doesn’t always spell disaster when it comes to performance. As long as a metro is able to maintain steady job growth, the impact of new supply on apartment market performance can be mitigated.

Atlanta has been somewhat of a poster child for that sentiment, as rent growth has been relatively steady considering the amount of new supply in the metro.

More than 10,200 units were delivered to the Atlanta/Fulton submarket, which includes Downtown, Buckhead and Midtown, in 2015 and 2016, more than any other submarket in the nation. These two years combined results in an inventory growth of 11.7% in the submarket, according to apartment market data.

The good news for apartment REIT properties in the submarket is that fundamentals in Atlanta are still good, although rent growth among REIT properties in the market is considerably below the market average. Annual rent growth among REIT properties in the Atlanta market was 0.0% as of April 2017. REIT performance should improve in the future once this swell of new supply is absorbed, as Atlanta continues to be a metro with strong job growth.


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Los Angeles

No other area in the nation has as many REIT apartments as the combined Los Angeles and Anaheim metros, with almost 60,000 REIT-owned units. In fact, the Marina Del Rey/Venice submarket has more REIT-owned units than any other submarket.

New supply in Los Angeles has been less of a factor than in the San Francisco Bay Area, but some submarkets were certainly subject to increasing supply numbers in 2015 and 2016. Marina Del Rey/Venice (4,118 new units, or 12.3% inventory growth) and Westlake/Downtown (3,848 new units, 6.7% inventory growth) both received ample amounts of new supply in 2015 and 2016.

The Marina Del Rey/Venice submarket slowed in 2016 from the previous year, but has experienced strengthening rent growth in early 2017. The Westlake/Downtown submarket has continued to slow in 2015 and 2016, but is still above the national average.

For a submarket with ample new supply, REIT-owned properties in the Marina Del Rey/Venice submarket have performed extremely well recently, with annual rent growth of 4.95% in April 2017. The Westlake/Downtown submarket has seen somewhat softer performance over that same time period, with annual rent growth of 2.3%, apartment data shows.


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Carl Whitaker

Carl Whitaker

Real Estate Analyst

Carl Whitaker is a Real Estate Analyst for Axiometrics.

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