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Market Reporting that Matters

February 2017 Market Trends

Surprising Markets Help Boost Apartment Market Performance

Wednesday, March 8, 2017

 

Sparked by a wave of significant increases in numerous markets – including boosts in some surprising metros – national annual effective rent growth increased to 2.3% in February to begin
2017 on a positive trend.

IN THIS ISSUE
Occupancy Reverses Course
Denver Outlook Not so Rocky
Sacramento Marks Year at No. 1

February’s figure represented a 10-basis-point (bps) increase from January’s 2.2%, but was 181 bps lower than the 4.1% of February 2016. Average effective rent increased $8 to $1,285, the second straight month that the average has risen.


  
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 Of course, the positive February movement does not mean that the moderating apartment market is out of the woods yet. It is still the lowest post-recession February number since 2010.

Markets large and small impacted the increase, with 28 of the Axiometrics Top 120 metros, based on number of units and other factors, showing rent-growth increases of more than 50 bps from January. Some 13 of those markets are among the 50 most major metros.

The biggest gainer among the major markets was Hartford, which was in negative territory as recently as August 2016. The Connecticut capital’s February rent growth of 3.5% was 257 bps above January’s 1.0% and 569 bps above its recent low of -2.1% in July 2016.

Another recent East Coast surprise has been Nassau County-Suffolk County, which achieved a rent-growth increase of 89 bps to 4.3% in February and broke into the top 10 of major metros.

Meanwhile, Birmingham, San Jose and New York escaped negative rent-growth territory with increases of 144, 108 and 95 bps, respectively. San Francisco, though still negative, surged closer to even with a 113-bps rent growth rise.

The top gainers among Axiometrics’ Top 50 Markets in February were:


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Among smaller markets, oil-dependent Odessa still has the lowest effective rent growth among the Axio Top 120 at -7.0% as the energy industry is still reeling from lowered oil prices. However, February’s rate was a 394-bps increase from January’s -10.9% and 1,976 bps higher than the -29.8% of February 2016 – the low for this cycle. Smaller Southern metros such as Naples, FL; Montgomery, AL; Columbus, GA; Tallahassee, FL; and North Port, FL also achieved rent-growth increases of more than 100 bps from January to February.


Occupancy Reverses Course

The national occupancy rate increased by 6 bps to 94.5% in February, snapping a five-month streak of declines. February’s rate was, however, 27 bps lower than the 94.7% of February 2016.

The increase was to be expected, as occupancy has risen each February since the Great Recession ended.


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Year-to-date (YTD) effective rent growth increased 52 bps to 0.8% in February, below the post-recession peak but ahead of the time frame’s low years of 2013 and 2016. February’s YTD rate fell 7 bps shy of the post-recession average.


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The highest recovery-era February YTD rent growth was recorded in 2011, while the lowest was in 2016.


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Denver Outlook Not so Rocky

Following a tremendous year of near-double-digit rent growth in 2015, the Denver metro area fell back to earth in 2016 and, despite some improvement in the first two months of 2017, remains well below its cycle peak of two years ago. Nevertheless, Denver’s supply and demand fundamentals point to a bright outlook for the apartment market over the next few years — if not the boffo levels that characterized the earlier years of the present real estate cycle.


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As of February 2017, apartment effective rents in Denver increased by 3.2% from the year before. The average effective rent for units increased by $43, from $1,344 in February 2016 to $1,387 in February 2017. The national average, on the other hand, increased by only $28. Denver’s occupancy rate was 94.0% in February, down 89 bps from February 2016, but still above the metro area’s long-term average of 93.4%.

The causes of Denver’s softening apartment market can be traced back to changes in the supply and demand fundamentals that, at one point, generated a monthly annualized growth rate of 12.8% (in February 2015), but today are producing growth rates that are about average for the top 50 markets in the country.


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On the supply side, Denver has experienced a veritable apartment construction boom in recent years, with more than 37,000 new units delivered since 2010 (and more than 8,000 units delivered in 2016). Despite the heightened level of new apartment deliveries, Denver is poised to add another 11,000 new units in 2017, which represents the construction peak for this cycle for the Denver metro area, based on Axiometrics’ models.

On the demand side, Denver job growth was 3.2% in December 2016, the last month for which data is available. That was a slight decrease from the month before and well below the 4.6% job growth rate posted in February 2015 (which coincided with the metro area’s rent growth peak this cycle).


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The supply and demand factors can be combined into a single indicator of market strength: a demand-supply ratio in which higher values indicate a market with more jobs created than units available. Using this indicator, 2.7 jobs were created in Denver for every new unit delivered to market in the fourth quarter of 2016. While still a “seller’s market,” there has been a significant moderation in the demand-supply ratio compared to this cycle’s peak in the fourth quarter of 2012.

Denver’s overall market performance obscures variation in performance at the submarket level—particularly when comparing the urban core and the suburbs.


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As in most major metro areas, Denver’s urban core has underperformed the suburban submarkets’ average for most of the current cycle. Since 2010, average downtown Denver rent growth has been 4.9%, compared to the suburban average of 6.8%. In 2016, urban core rents grew, on average, by 0.6%, while suburban submarkets saw average rent growth of 3.4%. In February, downtown Denver rents grew by only 0.3%, while suburban rents grew by 3.5%.

 


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Despite the soft urban-core submarket, Downtown Denver is still on track to add about 2,300 new units in 2017, about equal to 2016 deliveries. The above map shows non-stabilized properties in the downtown area: Orange icons are properties currently in lease-up; blue icons are those under construction; and green icons are those still in the planning stage. With all of these new units still in the pipeline, Axiometrics is projecting a rent growth rate of less than 1% for 2017, significantly below the submarket’s long-term average growth rate of 2.9%.


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Strong supply and demand fundamentals are projected to maintain a healthy and sustainable apartment market in Denver in the long term. The number of jobs in Denver is projected to increase, on average, by about 2.1% a year through 2021, which is lower than this cycle’s average of 2.9% job growth, but still above the metro area’s long-term average of 1.7% job growth.


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The steady pace of job growth is welcome news for Denver, as the metro area is poised to add above-average levels of new supply over the next five years.  Axiometrics projects that Denver will add about 8,000 new units per year from 2017-2021, compared to about 5,400 for this cycle and 5,300 over the long-term.

Denver’s apartment market should remain strong, even if rent growth isn’t at the heights of 2014 and 2015. Above-average job growth, combined with a dearth of affordable single-family housing and promising demographics, will yield a growing apartment market with the seventh highest average annual rent growth rate among the top 50 markets over the next three years.


Sacramento Marks a Year at No. 1

Sacramento’s professional basketball team may have lost its top player, DeMarcus “Boogie” Cousins, in a trade, but California’s capital has retained its position as the King of Apartment Markets.

For the 12th straight month, Sacramento reported the highest annual effective rent growth among the Axio top 50 markets, based on number of units. However, growth decreased in February to 9.0% from 9.5% in January.

While Riverside remained at No. 2, Fort Worth supplanted Las Vegas for the No. 3 spot, and San Diego jumped to No. 5 from No. 14. On the Eastern Seaboard, Nassau County-Suffolk County (Long Island) advanced to No. 10 from No. 17 and Hartford, as discussed above, has rebounded from negative rent growth last August to No. 15 on the chart.

Jacksonville returned to the chart, while Warren, MI and Tampa fell off.


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Please contact us for any further information. 

Jay Denton

Senior Vice President, Analytics

Email: jdenton@axiometrics.com

Main Office: 214-953-2242

 

Stephanie McCleskey

Vice President, Data Acquisition

Email: smccleskey@axiometrics.com

 

 

 

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