Urban Core Apartments Poised for Rebound, Market Forecasts Say

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Urban Core Apartments Poised for Rebound, Market Forecasts Say

Construction Expected to Subside

By Dave Sorter | Wednesday, November 30, 2016

Half a century ago, Petula Clark sang “Things will be great when you’re downtown.” In 2016, millennials and apartment developers seem to agree, as the largest
concentration of new properties are located in the urban core to meet the younger generation’s desire to live where the action is. 

The issues surrounding urban core apartments for property owners and managers, though, are:

  • Central-city apartments are usually the most expensive in a market.

  • The sheer number of new units has caused annual effective rent growth in urban core submarkets to – in most areas – underperform suburban submarkets and the metro as a whole.

But the tide could be changing in the next couple of years. As downtown/uptown construction ramps down in the next couple of years and developers set their sights on submarkets where rent growth is currently higher, Axiometrics’ market forecast is for stronger urban-core performance over the next two to three years.

The data behind the forecast comes from Axiometrics’ new Submarket Supply/Demand Model, a new apartment forecasting product that includes historical data and five-year forecasts for 1,014 submarkets across the top 120 apartment markets nationwide. The model shows rent growth increasing in almost every urban-core submarket studied, with the amount of supply decreasing.

As the table above shows, the negative annual effective rent growth in oversupplied submarkets such as Houston’s Montrose/River Oaks and New York’s Midtown West is expected to turn positive in 2017 as supply is greatly reduced. By the end of 2019, urban-core rent growth of more than 5% could be the rule, rather than the exception. 

And that could come at the expense of the suburban submarkets, many of which are now outperforming their metros. The reason is the construction cycle. 

Since post-recession apartment development hit its stride in 2013, most of the construction has been in the urban core to meet the desires of the prime renter group – millennials – and urban-core rent growth was higher back then. But nowadays, central-city rent growth is low and developers may be having a hard time convincing lenders to provide financing for a new property that likely wouldn’t net much rent growth. 

But because outer-urban and suburban rent growth is higher than in the urban core, developers are more likely to receive financing for new projects in those submarkets. Suburban areas have surpassed the center city in terms of new supply, but those properties are more spread out among different submarkets. 

So as construction of urban core apartments diminishes and suburban development increases – though the net new supply will decrease in most metros – center city rent growth will rise while suburban rent growth will likely fall. 

Those market forecasts will please urban core property owners and managers, as long as millennials continue to believe that, as Ms. Clark sang, “you can forget all your troubles, forget all your cares, so go downtown, where all the lights are bright.”

 

Dave Sorter

Dave Sorter

Journalist

Dave Sorter is an award-winning journalist who spent 30 years as a newspaper reporter and editor before joining Axiometrics. He oversees all Axio blogs and newsletters and serves as senior editor of all Axio publications.

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