Several Apartment Markets Slow Considerably Since July
National Rent Growth Negative in Second Half of 2016
By Louis Rosenthal | Monday, March 20, 2017
Something curious happened to the national apartment market during the second half of 2016, the true consequences of which are only now fully coming into view. From July-December 2016, apartment effective rent growth fell by 0.2%.
Since 1996, only four other years have recorded negative rent growth from July-December, and all four -- 2001, 2002, 2008 and 2009 -- were associated with national recessions. Before you panic, the negative rent growth seen in the second half of 2016 does not mean that a national recession is on the horizon (more on that below) — rather, it reflects a broader slowdown in the industry that saw well-above-average growth rates since 2011.
At the national level, the deceleration in job growth combined with an acceleration in new apartment deliveries (which have yet to reach a peak for this cycle, according to Axiometrics’ forecasts) led to moderation in the ratio of jobs gained to units delivered.
At the metro level, we’ve seen significant softening in several marquee markets, including Nashville, Seattle, Phoenix and Austin.
The chart above shows the 10 apartment markets with the largest decline in annual rent growth from July 2016-February 2017. Reading from right to left, each bar starts at its corresponding annual rent growth value in July 2016, and ends at its February 2017 value. For example, Nashville’s annual rent growth was 6.0% in July 2016, but was 2.4% in February – a 358-basis-point (bps) drop over seven months. For comparison, the national average fell from 3.2% to 2.3%, or 92 bps.
Some of this decline is attributable to seasonal trends in apartment performance. The third quarter of the year typically features robust growth rates, followed by less robust performance in the fourth quarter. In 2016, however, the third quarter left a lot to be desired. At bottom, it’s the diametric changes in the supply and demand trends, as well as the movement back toward more sustainable levels of growth, that are causing most major markets in the U.S. to slow.
Even though the national apartment market is softening, and even though rent growth fell in the second half of the year for the first time since the Great Recession, a national apartment market recession is not in the cards. Rather, Axiometrics is projecting a “soft landing” from the halcyon days of the early to mid-2010s.
The national apartment market saw a “hard landing” in 2008 and 2009, when the industry quickly moved from a period of oversupply (which, by itself, is not necessarily cause for concern as the market tends to quickly flip between expansion to oversupply and the reverse) into a deep recession. By comparison, Axiometrics anticipates that 2017, like 2016, will be slightly oversupplied, before returning to expansion in 2018. The key word for 2018 and 2019 is “stabilization,” a far cry from the deteriorating fundamentals of 2007 through 2009.