Top 10 Apartment Market Stories of 2016: Part 1
Thursday, January 5, 2017
The year just past was an eventful one for the apartment and student housing markets. Though performance moderated – plummeted in some cases – from the highs of 2014 and 2015, rents kept rising in most markets and annual effective rent growth remained above the long-term average.
But there’s no doubt that we’re seeing a different market than we saw one and two years ago. From changing economic indicators to shifts in geographic strength, the apartment market cycle is continuing to evolve.
Picking the top 10 stories of the year was hard, but the next two blog posts will attempt to cull them out. As usual, we will count down from No. 10 to No. 6 today, followed by the top five. After that, we’ll run down the top student housing stories of the year.
Without further ado:
Of the two big political stories that took place in 2016, only one is expected to have a significant effect on the U.S. apartment market. And it’s not the election of Donald Trump as president.
On the other hand, Great Britain’s vote to leave the European Union – the “Brexit” – could decrease the value of British real estate as the United Kingdom negotiates its way out of the EU (though post-vote
regrets are putting a damper on that), and then seeks new trade deals on its own. British speculators, looking for a safe haven for their investment pounds and shillings, could look to the attractive U.S. apartment market.
The U.S. government has been helping attract international investors by easing the tax burden on many of these deals.
On the other hand, Trump’s assumption of the presidency likely will not affect the apartment market unless his administration’s policies dramatically change the economy. Should he accomplish the 4%-5% increase in Gross Domestic Product he believes he can, the increase in consumer confidence and job creation would bring great joy to developers, property owners and property managers.
9-Single-Family Sales Up, But Prices Still too High
The good news: More single-family homes are being sold than were a year ago, according to the U.S. Census Bureau and the National Association of Realtors (NAR).
The bad news: These homes cost more than ever.
Some 592,000 new homes were sold in the 12 months ending in November on a seasonally adjusted basis, the Census’ single-family housing research showed. That number represented a 16.5% increase from the 508,000 sold in the year ending in November 2015. July’s annual total of 622,000 was the highest volume since October 2007.
Meanwhile, the 5.61 million existing homes sold from December 2015-November 2016 were the most since February 2007, the NAR reported, and was 15.6% higher than the number sold in the previous 12-month period.
The prices, however, are likely holding back many first-time homebuyers. The average new home sold for $305,000, while existing homes sold for an average of $234,900, both higher than one year ago. Inventory of existing homes is down 9.3% from last November, the NAR reported.
The rising prices and lack of inventory will likely keep a lot of renters tied to apartments, which will boost occupancy. Also, the preference to rent is still strong among many millennials, which also aids apartment market strength.
8-Apartments Remain Attractive Investments
The final 2016 numbers haven’t been compiled yet, but through November, transaction volume of multifamily deals was 8% above the 2015 rate, according to Real Capital Analytics, setting the stage for a third straight record year for apartment market investment.
While multifamily deals are on the rise, the rest of commercial real estate was down 6.8% through the first three quarters of 2016, according to Axiometrics consultant Sam Chandan. Multifamily is second to industrial transactions in terms of pure volume, but the increase in multifamily volume compared to the decrease in total CRE volume is a sign of the value that investors see in apartments.
However, the tightening of credit by lenders this year and the moves by many cities to tie affordable housing to tax breaks for apartment construction could have an effect on the transaction market in the near future.
It’s a logical turn of events. The pace of job growth declines, reducing the demand for apartments. The overall moderation of the market has caused a slight dip in occupancy rates. So, property owners and managers try to attract new residents by offering more concessions.
Apartment market data shows that some new properties are offering up to two and three months’ free rent to fill their units in an increasingly competitive market. This is happening especially in underperforming metros, such as Houston, and urban-core areas where new supply has been prevalent and rent growth has fallen. The San Francisco Bay Area and New York fall in that category, while residents don’t quite catch the same break in higher-performing metros, such as Southern California and Seattle.
The concession rate at existing properties is the highest it has been since March 2014.
If negative rent growth continues in many urban-core submarkets, offerings of multiple months of free rent may continue. Until then, renters in those areas looking for a new apartment will be catching a nice break.
The consolidation of publicly traded apartment REITs continued in 2016, as Mid-America Apartments (MAA) purchased Post Properties (PPS) in a $3.88 billion deal that closed on Dec. 1.
The new entity, which continues that MAA name, consists of more than 300 properties with about 105,000 units. The key to the real-estate transaction was where those units are located.
MAA properties tend to be spread out among suburban submarkets, while the former PPS properties were primarily in the urban core and had upper-tier price points. The average effective rent at MAA units was $1,082 in November, compared to PPS’ $1,510.
MAA had the highest annual effective rent growth among the 10 REITs in November, while Post had the fifth highest. Combined, the company would have had the second highest rate.
Other potential deals were rumored throughout the year, but none have come to fruition as the year turned.