Top 10 Apartment Market Stories of 2016: Part 2
Friday, January 6, 2017
Yesterday, we counted down the Nos. 6-10 stories of the past year, so now it’s time for the crème de la crème. Though the 2016 apartment market was different than the previous years, most of the same apartment market research factors came into play: Job growth, supply and the rise and fall of individual metro markets.
Drum roll, please…
5-The Rise of Midwestern Markets
The Midwest has not fared as well as the West and South when it comes to metro apartment markets. But two areas in particular brought strengthening to the Great Lakes, apartment data finds.
The two metropolitan divisions within the Detroit area were robust in 2016. Detroit itself recorded annual effective rent growth as high as 6.7% (in August) and was above 5% for most of the year. Meanwhile, the suburban Warren market was at 5.1% in November.
Detroit has long been a volatile market, but rent growth was on a generally upward track from September 2015-August 2016, after which some moderation has occurred. Rent growth was below 2% as recently as February 2015 and was below 3% in August 2015. But the recent trends have placed both Detroit and Warren among the metro elites.
To the northwest, Minneapolis-St. Paul also has been a bright spot. The Twin Cities market has recorded the highest occupancy rates among major metros for the past four months at more than 97%, and rent growth was at a 47-month high 4.1% in November after starting 2016 at 1.3%.
Before March 2016, rent growth reached 3.0% in only four months of the previous 24. As of November, growth had surpassed that mark for seven straight months.
4-Job Growth Declines
United States employers added 2.2 million jobs in 2016, compared to 2.7 million the previous year, according to the Bureau of Labor Statistics. Even though the unemployment rate of 4.7% was lower than in other post-recession years, the decrease in new jobs results in a decrease in apartment demand.
Year-over-year job losses in the Mining & Logging (oil) sector, along with stagnant job growth in Manufacturing and other sectors helped pace the slowdown. The subsectors with the highest job growth tended to be lower-paying service jobs, which also has an effect on demand for the large amount of new, Class A supply coming to the market.
The good news was that job gains were still above the “jobless recovery” levels of the early post-recession period and that several sectors, such as technology, are still going strong. And, there are plenty of construction jobs available if anyone wants them. Filling those vacancies would go a long way toward catching up with the delays in apartment construction (see No. 3 below).
3-New Supply Hasn’t Peaked Yet
The huge amount of supply in markets such as Houston, New York and the San Francisco Bay Area has affected apartment performance. But the buildings that started construction before demand factors moderated (see No. 4 above) and are still in the planning stages are still being completed.
Also, many markets have not yet seen excess supply and still need more properties to meet demand.
The peak for this real-estate cycle was supposed to occur in 2016, but delays have pushed it to 2017, in which 372,893 new units have been identified for delivery. Some 296,621 apartments were expected to come to market in 2016.
The reason the peak date moved wasn’t necessarily because of a sudden surge in new properties. The primary reason was that a shortage of construction labor forced many projects planned for 2016 delivery to be delayed. It’s like dominos. Project A is delayed a quarter or two, which pushes Project B into its own delay.
Deliveries are expected to increase in the first two quarters of 2017 before starting to moderate in the second half of the year. Supply is forecast to drop in 2018 and 2019.
2-Smaller Markets Emerge
Big doesn’t necessarily equal strong, and the metros with the most robust rent growth in 2016 are prime evidence.
Sacramento assumed the mantle of effective-rent-growth metro leader in March and showed no signs of giving up the top spot through November. California’s capital was the only metro among the Axiometrics Top 50 – based on number of units – to record double-digit rent growth throughout the first 11 months of the year.
Meanwhile, the Riverside, CA metro was in the top three for most of the year and had been No. 2 to Sacramento for four straight months as of November. This market, known as the Inland Empire, is the least expensive in the Los Angeles area, which is one reason performance is so strong.
The robust fundamentals in both California markets can be attributed to many of the same causes: Extremely strong job growth and only a moderate amount of new supply. The demand created by new jobs can absorb the new properties coming to market, allowing property owners and managers to push rents higher.
Other smaller major markets showing strength during the year included Las Vegas, Fort Worth, Salt Lake City, Charleston and, during the later part of the year, Memphis. Among non-major markets, Reno, Tacoma and Colorado Springs were especially robust.
Which brings us to…
1-Large Markets Cause National Market Decline
So, all these smaller markets are doing well, yet the national apartment market is performing roughly half as well as it did in 2014 and most of 2015, with 2016 annual effective rent growth estimated to be 2.3%. The reason has to be declines in larger markets.
Rent growth in many major markets fell precipitously in 2016. Metros such as Boston and Philadelphia, which were pleasant surprises in 2015, came back to Earth. Even continuously strong metros like Seattle, Phoenix, Dallas and Atlanta experienced rent-growth drops of 100 basis points or more. Denver continued its slide from the unsustainable double-digit rent growth of late 2014-mid 2015.
But the poster children for the 2016 apartment market were the San Francisco Bay Area, New York and Houston.
Bay Area annual effective rent growth plummeted from the double digits of 2014 and 2015 to negative territory in 2016. Though job growth is still strong, the pace has declined, much like the nation’s. Meanwhile, the amount of new supply coming to market is more than can be absorbed, which means landlords have to cut back on rent to remain competitive.
Axiometrics had predicted the Bay Area to moderate in 2016, as it did the national market and other metros.
New York did not have as far to fall as did the other end of Interstate 80, but it also ended 2016 with negative rent growth after exceeding 4% for most of 2015. Supply certainly is the primary issue in the Big Apple, as the 14,532 new units in 2016 was the most outside of Texas. The number of new apartments coming to market in 2017 is almost double last year’s amount at 28,721 the most in the nation.
Houston, meanwhile, continued the decline that began soon after oil prices started to fall in late 2014. Job growth was almost flat while a glut of new supply hit the market.
The good news is that all these markets are expected to escape negative territory in 2017.
The apartment-market moderation of 2016 was expected and is just part of the normal cycle. It just means that the next rise is that much closer.