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Market Reporting that Matters

July 2017 Market Trends

The Year of the Stable Apartment Market

Tuesday, August 8, 2017


Stability has been the hallmark of apartment market performance so far in 2017, and July’s annual effective rent growth of 2.4% was further evidence. 

Rent growth had stayed within a 20-basis-point range in the six months from December 2016-May 2017 before jumping to 2.5% in June, according to apartment rental data. July’s rate was a minuscule 9 bps lower than June’s, essentially keeping things at the same pace – just above the long-term average of 2.3%. July’s rent growth was 77 bps lower than the 3.2% of July 2016.



Occupancy Also Remains Level

Sacramento May Be Ready for a Fall

Richmond Makes a Move

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The national occupancy rate also remained stable at 94.9%, just a 4-bps difference from June’s rate.

The forces driving performance account for the stability in the national market. While demand is still high, thanks to the 200,000-plus jobs added in each of the last two months, the new supply coming to market – specifically, the number of properties in the lease-up stage in many of the largest metros – is limiting landlords’ ability to raise rent and is keeping the occupancy rate below last year’s level.

The supply/lease-up factor has significantly impacted rent growth in markets such as Dallas and Seattle. Job growth has declined from its two-year peaks in both metros, but at 3.4% in Dallas and 2.4% in Seattle in June 2017, it is still very strong and generates apartment demand.

But Dallas’ rent growth was 2.4% in July, the lowest it’s been since August 2010. Seattle was stronger at 4.6%, its trough since June 2012 -- though the second-quarter Market Momentum survey conducted by the National Apartment Association and RealPage found that industry leaders believed Seattle would have the highest rent growth in the next year. There are just so many properties in each market that have just reached or are nearing completion that the competition for residents is keeping rents down. July lease-up statistics show 94 Dallas properties in lease-up in July, while Seattle had 43, just two fewer than the year's high of 45 set in both May and June.

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Existing units also are affected, as evidenced by RealPage lease transaction figures that show renewal rent growth falling from 5.6% in the second quarter of 2016 to 4.9% one year later in Dallas, and from 8.1% to 6.8% during the same time frame in Seattle. 

One note about Seattle: The slowdown is occurring mostly in the suburbs, as the urban-core Downtown/Capitol Hill/Queen Anne submarket recorded 7.6% annual effective rent growth in July. That submarket had about one-third (14) of the metro’s lease-up properties in July.

Occupancy Also Remains Level

As mentioned above, July’s occupancy rate of 94.9% was essentially the same as both May’s and June’s. Though quite close to the 95.0% at which Axiometrics/RealPage considers a market full, these recent rates almost ensure that this summer’s occupancy will underperform last summer’s rates, which were 95.1% and 95.2%.

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Meanwhile, Year-to-Date (YTD) effective rent growth increased 24 bps to 4.1% in July, above only the 4.0% of 2010. lifting it above 2013 and to within 5 and 6 bps of 2012 and 2016, respectively.

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July’s YTD rent growth was 43 bps lower than the post-recession July average of 4.5%

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Sacramento May be Ready for a Fall

Rents in Sacramento grew by an annualized rate of 8.2% in July, the highest rental growth rate among the top 50 markets tracked by Axiometrics for the 18th straight month. Rent growth in California’s capital bested the national average starting in the fall of 2013 and has not slowed since — outperforming the national average by about 580 basis points (bps) in July.

But the drivers show a potential lull in the market ahead, which could jeopardize the market’s position at the top of the charts.

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Sacramento can post incredible growth rates thanks to the relative pace of job growth and permitting/construction activity, which in turn has created a pricing crunch for renters. 

The Sacramento area only began to see positive job gains in August 2011, evidence of the metro’s prolonged post-housing-bust “hangover.”  Job growth reached as high as 4.1% in February 2016, but since then has moderated by over 200 basis points, coming in at 1.9% in June on the back of 18,500 new jobs added to the metro in the year ending in June). The metro has gained only 11,600 and 13,000 in the years ending in April and May, respectively, and had gained 32,900 jobs in the 12 months ending June 2016.

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On the supply side, multifamily permitting has finally surpassed the metro’s long-term average, although single-family permitting remains below its long-term average. Even though permitting levels are at or nearing their historical averages, the Sacramento area was always a low-supply market, such that matching long-run permitting will have very little impact on home prices and rental rates.

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The current apartment construction pipeline in Sacramento suggests that very little relief is on the horizon. Across the top 50 apartment markets, Sacramento is set to deliver the third smallest number of new units by the end of 2017.  Sacramento, the capital city of the largest state in the country, plans to build about as many units as Birmingham, AL by the end of this year.

The question remains, how long can Sacramento remain the rent growth leader among the top markets tracked by Axiometrics? For a glimpse into the future, consider the fact that in 2015 and 2016, Sacramento’s apartment inventory grew by only 0.3% -- the smallest inventory growth rates across the top 50 apartment markets.

However, by the end of 2017, three markets will have lower inventory growth rates than Sacramento: Warren, MI; Nassau County, NY; and Riverside, CA. Moreover, in 2018, over two dozen markets will feature lower inventory growth rates than Sacramento. This implies that, in order for Sacramento to remain the rent growth leader over the next few years, demand-side factors — namely job growth —must take precedence.

Nevertheless, 2017 is expected to end with Sacramento, once again, topping the charts with an average rental growth rate above 5%. But given what we see occurring on the demand- and supply sides, Sacramento’s forecast rent growth drops to about 3% in 2018 before rising again in 2019, though not to the levels of the past few years. The metro will likely yield its No. 1 position in the interim.

What could replace Sacramento atop the rent-growth chart? Apartment industry leaders voted Seattle as the most likely prospect in the second quarter Market Momentum survey. Riverside has been the No. 2 metro for more than one year and could move up if Sacramento falters.  No. 3 Las Vegas has seen rent growth climb 158 bps to 5.5% since April.

Richmond Makes A Move 

While the top 3 of Sacramento, Riverside and Las Vegas remained the same as in June, Richmond has quietly made its way to No. 5 among the Axiometrics top 50 – based on number of units – in July. 

Richmond jumped from No. 11 in June on the strength of a 61-bps rent-growth increase to 4.8% in July -- 187 bps higher than the 3.0% of one year earlier. One reason was that the metro’s job growth has increased significantly since the beginning of the year, from 0.7% in January to 2.2% in June, the latest metro figures available from the Bureau of Labor Statistics. 

Another reason: Relatively little supply. Just 1,718 units have been identified for 2017 delivery as of Aug. 7, only 682 of which had been completed in the first half of the year. 

Elsewhere on the chart, Nassau County-Suffolk County (Long Island) returned to the list at No. 10. Hartford, which has been up and down all year, was up in July at No. 16 after a nation-leading 107-bps increase from June to 3.5% rent growth.

Hartford made the list in February after leaping from 1.0% in January to 3.6% in February, then fell as low as 0.1% in April before its current rebound.


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