Industry News

Market Reporting that Matters

The Latest Apartment Forecast

2017 Challenging, then Improvement Expected

By | Thursday, September 22, 2016

Choose your cliché:

  • Patience is a virtue.
  • Good things come to those who wait.

One of those sayings will likely apply to you, depending on whether you are on the revenue side of the apartment industry or on the renter side, based on Axiometrics’ latest apartment-market forecast.

If you’re a property owner, developer or manager, you might want to exercise a little patience. Though market performance is still strong compared to the long-term average since 1995, the industry is moderating from its outstanding showing in 2014 and most of 2015. Things are expected to start regaining steam in 2018, the apartment forecast states.

If you’re a renter, your perseverance as your monthly expenses have skyrocketed the past few years is being rewarded. The rate of rent growth will decelerate this year and next for many reasons, not the least of which are all those new, amenity-laden apartment properties that have been sprouting up like bluebonnets in the Texas spring.

Rents increased by 4.6% in 2015 and are forecast to rise another 3.4% in 2016, according to Axiometrics economists, still nicely above the long-term average of 2.2%. The market will likely fall slightly below that rate in portions of 2017, when 2.1% annual effective rent growth is expected.

The new supply coming to market is playing a large part in the slowing of rent growth. With almost 337,000 new units identified for completion this year and more than 272,000 more already expected in 2017 – on top of the almost 267,000 delivered in 2015 – the competition this engenders forces property owners to minimize rent increases.

As supply increases, Axiometrics forecasts the rate of demand growth to decrease slightly through 2017. The national economy added about 5.69 million jobs in 2014 and 2015 combined, compared to the 4.68 million expected during 2016 and 2017 combined. With an 86% correlation between job growth and rent growth, the forecast points to a slowing market.

Patience over the next 1½ years is predicted to pay off in 2018, when rents are expected to rise 3.6%, and especially in 2019, when a 4.1% increase in rents approaches the pace of 2014 and 2015 as the building boom simmers down. Expect another couple of years of moderation in 2020 and 2021.

Other factors influencing the apartment-market forecast:

  • Lifestyle choices: Millennials are choosing to rent longer rather than purchase a house, while many empty-nest baby-boomers are selling their homes and moving into Class A apartments.
  • The single-family home market. Even though government figures for July 2016 showed that home sales were at their highest rate since October 2007, increased prices are keeping many potential home buyers out of the market. Analysis show a lack of supply is the culprit, not lack of demand.

Many markets are forecast to mimic the national trend.

Denver, for example, was among the top performers in 2014 and 2015. Supply, however, overtook demand late last year as job growth moderated from 4.1% at the end of 2014 to a forecasted 1.6% at the end of 2017. Meanwhile, almost 15,000 new apartments came to market in 2014 and 2015 combined, with more than 15,600 units identified for 2016 and 2017 delivery.

Rents increased 6.5% in 2015 and are predicted to rise by 4.7% this year and a below-long-term-average 1.9% in 2017. But the Rocky Mountain climb will resume in 2018, when renters will pay 3.5% more than they did in 2017.

Other markets, though, are traversing their own paths, based on their individual economic conditions.

Houston has been the poster child of market decline the past 18 months, but many attribute the weakening solely to the recent energy bust. While it’s true that the loss of energy-industry jobs has hurt the Houston apartment market and likely drove it to negative rent growth, it’s not the only factor.

Despite the surge in construction nationwide, the above-average performance indicates the market is not oversupply. Houston – more specifically the urban-core Montrose/River Oaks submarket – may be one of the exceptions.

Axiometrics believes the sheer amount of new properties – almost 31,000 delivered in 2014 and 2015 and almost 25,000 more identified for 2016 alone – would have slowed the pace of rent increases. Montrose/River Oaks rents have been flat or worse for the past 22 months, which predated the energy-job decline. But the energy sector’s struggles exacerbated the apartment market’s trend from moderation to weakness.

But, unlike the national market, recovery is forecasted to begin in 2017, when rents will rise at a higher rate than the nation as a whole. An increase in job growth from 0.3% in 2016 to 1.2% in 2017 and 1.8% in 2018, will mean a 2.8% increase in rents next year – a 5-percentage-point swing from the 2.2% rent decrease anticipated in 2016.

San Francisco, which fell quickly from the top of the strongest-markets list in mid-2015 to negative rent growth in July 2016, has a forecast trend line similar to Houston’s. Renters will love 2016, as Axiometrics predicts the high average rent to decrease 2%. But the rent hikes come back in force next year and beyond, with 3.3% rent growth in 2017 and 6.0% in 2018.

On the other hand, several Northeastern markets are going the opposite direction from the national trend.

The Washington, DC market had been among the weakest in the nation in 2013 and 2014, but jobs started sprouting up in the nation’s capital in 2015 and are forecast to remain in robust growth mode through 2017. While the heavy construction of new apartment properties won’t abate until 2018 – about 22,750 new units are identified to come to market in 2016 and 2017 combined, on top of the almost 22,000 delivered in 2014 and 2015 – it’s not too much to absorb the demand from the new jobs.

After rents rose just 0.5% in 2014, property owners and managers increased the levies by 2.0% in 2015. Axiometrics predicts DC rents to increase 3.4% in 2016 and 4.0% in 2017, a pace faster than the nation as a whole. But, unlike the national rate, the capital’s rent increases will slow down to 3.1% in 2018 and 2.7% in 2019 before returning to the 4.0% range in 2020 and 2021.

Similar acceleration is forecast to take place 38 miles up Interstate 95 in Baltimore, where the rate of job growth is accelerating in 2016. Supply is predicted to exceed demand this year, and rents are expected to increase 3.8%, rising to 4.1% in 2017. But the tempo of rent increases will slow down a few beats in 2018 and 2019, rising by 2.9% and 2.5%, respectively.

Just like that luxurious vacation, not all wonderful things can last. But even though the apartment market is no longer vacationing in Monaco, it’s still living the upscale life. After a couple of years, it will be ready to fly off to the beach again.

Javascript is not enable. This may affect content rendering. You can enabled Javascript in your Settings Menu.