November 2016 Market Trends

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November 2016 Market Trends

Apartment Market Performs as Usual in November

Wednesday, December 7, 2016

National apartment market performance was down slightly in November 2016, but that’s nothing new as we enter the holiday season. The moderated market of 2016 makes last month’s numbers look worse than they are. 

Annual effective rent growth has decreased from October to November in four of the seven years since the end of the Great Recession, while occupancy has declined in all seven years. 

Rent growth increased in November 2010, 2012 and 2014, with the largest 11th-month decrease coming last year.

As noted above, national annual effective rent growth was 2.4% in November 2016, a 21-basis-point (bps) decrease from October’s 2.6% and 218 bps lower than the 4.5% of November 2016.

The latest rate was the lowest since July 2010, but there were a few positive signs: 

  • Some 42 metros of the Axiometrics Top 120 – based on number of units – achieved annual effective rent growth of 4.0% or higher in November, almost double the national long-term average of 2.2%.
  • Class A annual effective rent growth has ticked up the past two months, from 1.6% in September to 1.9% in November. Though two months does not necessarily a trend make, if the upward movement continues, it could mean increased overall rent growth in the next several months. Class A historically has been a leading indicator of overall trends – but let’s not rush into calling the latest figures a sign of a turnaround; let’s wait to see the impact of supply during the next few months.

However, on the negative side: 

  • The seven metros recording negative rent growth in November included Houston, San Francisco, San Jose, Oakland and New York, all of which are among the largest apartment markets in the nation and, thus, have a large impact on the national rate. Birmingham and Oklahoma City were the other two markets with rent growth in the red.

Occupancy Down, but Still Above Post-Recession Average

The national occupancy rate fell 20 bps to 94.6% in November, the lowest since March 2014, but still well above the post-recession long-term average of 94.1%. Among the Axiometrics Top 120, some 56 metros recorded occupancy of 95.0% or higher – the point at which Axiometrics considers a property or market full. 

However, though the troughs of the fourth quarter have been similar the past few years, the November 2016 occupancy number is lower than those of 2014 and 2015.  Therefore, we could see occupancy fall to 94.5% or even a little lower in December if the post recession trend of an approximately 15-bps decline in occupancy from November to December holds.

Because of normal seasonality, year-to-date (YTD) rent growth has decreased from October to November each year since the recovery began, and did so again in 2016, falling 60 bps to 3.0%. This year’s trend continued on much the same line as 2013.

November’s YTD performance placed the rate 111 bps below the post-recession November average of 4.1%. Looking at the slope in the chart below, this year’s fourth-quarter decline is similar to the post-recession average. It was the summer months that brought 2016 below most other recovery years.

The chart below depicts the post-recession November YTD performance.

DC Metro Rebounding from Sequester

Real estate magnate turned President-elect Donald Trump will ride into Washington, DC early next year to take up residence at, arguably, the hottest piece of residential real estate in the world: the White House.

Many Trump administration bureaucrats and cabinet secretaries, along with the president-elect’s personal coterie of advisers, will soon be in the market for apartments in the DC area. Because the transfer of power involves little to no change in the quantity of positions to fill, the impact of a transition on the apartment market should be minor.

The DC apartment market is connected to politics (namely, budgetary decisions concerning federal employment), though the metro area’s fortunes rest primarily in larger supply and demand factors that operate separately from government.

Following a turbulent 2013 and 2014, which featured periods of negative rent growth, the Washington, DC metro area is finally showing signs of returning strength, even as rent growth (2.2% in October) remains well below the capital city’s long-term average (3.2%). On the optimistic side, job growth — a leading indicator for rent growth — has returned to above-average levels, averaging about 2.5% for 2016. The big question mark concerns the extent to which a batch of new supply (more than 11,000 new units) scheduled to deliver throughout 2017 will be absorbed.

Another major question concerns the operations of the federal government itself — primarily Congressional budgetary decisions — that impact Washington DC’s apartment market.

Consider, for example, the impact of across-the-board spending cuts enacted as part of the “sequester,” which went into effect in March 2013. Many federal agencies were forced to implement hiring freezes for the duration of the spending cuts. According to some estimates, 36% of all presently employed workers in DC work directly or indirectly for the federal government. This implies that any major changes in federal government employment levels could, in turn, impact the entire DC-area apartment market.

That is just what we saw. In early 2013, job growth among federal government employees turned negative, falling by as much as 4.5% in March 2014. Between 2013 and 2015, federal employment levels fell by 1.4%; however, non-federal government employment grew by 1.5%. The impact decreased federal employment had was severe enough to drag down total DC job growth. In short, while the DC job market was weak from 2012-2014, the decline in the later part of that period was almost entirely a product of job losses and slow job growth in reaction to the sequester.

That inevitably led to weakness in the apartment market. DC-area rents grew by 1.6% during the Great Recession, despite almost no job growth. From the start of the recovery until the sequester, rents grew by 3.9%, supported by a 1.6% increase in employment. Once the sequester began to take effect, however, rents fell on average by 0.2%, as job growth moderated to 0.6%. Since 2015, Washington, DC has seen significant improvement, with rents growing by 1.8% and employment by 2.2% as later budget agreements unfroze hiring in most federal agencies.

In the supply side, Axiometrics anticipates that more than 10,000 new units will have been delivered in the DC metro in 2016. This was slightly lower than the 11,000-plus new units delivered in 2015 and the 11,800-plus units expected for 2017 delivery — the largest single-year increase in metro DC since at least 1998.

Some 13% of the new supply in 2016 was concentrated within DC’s four urban-core submarkets, especially the Capitol Hill area. In contrast, the urban core accounted for 32% of 2014 deliveries and 15% of 2015 deliveries. The drop-off in urban core deliveries in 2015 and 2016, explains why rent growth is very similar among urban and suburban submarkets.

The similarity between suburban and urban-core rent growth in DC – 1.9% in the urban core and 2.0% in the suburbs since 2011 – goes against the national trend, which finds the suburbs outperforming the city center significantly. The gap between urban and suburban performance is unusually small in DC, which speaks to relatively low new supply levels in the urban core compared to the rest of the market.

Nevertheless, new supply is ramping up, generating concerns that DC might soon experience an apartment glut. However, the DC apartment market appears to be currently undersupplied relative to the number of new jobs being created within the metro area.

The run-up in rent growth that began in late 2014 occurred just as new supply levels were approaching their peak. Typically, we see rent growth moderate as new supply grows — but that’s not the case in DC, suggesting that, even with lots of new supply hitting the market, there exists enough demand to push rents (if at a below-average pace).

Looking forward, Axiometrics expects the DC metro to end the year with 2.2% rent growth, up from the 1.5% of 2015. In 2017, Axiometrics forecasts annual effective rent growth of 3.2%, driven in part by  above-average 2.6% predicted job growth and higher absorption levels than new supply levels. Taking the longer view, Axiometrics projects strong average annual rent growth through 2021. In fact, among the top 120 metro areas in the country, Washington, DC is expected to rank in the top five for average annual rent growth in our forecast window (just behind the San Francisco Bay Area and Seattle).

In summary, the Washington, DC metro area’s apartment market saw a quick post-recession rebound, followed by a sharp slowdown in rent and job growth (partly because of the federal budget sequester). After more than two years of steady improvement, the nation’s capital appears to be on the brink of sustained rent growth levels above the metro area’s long-term average and the average of other major metro areas. 

Midwestern Markets Emerging

Midwestern metros have generally not had the strongest apartment markets in recent years, but that started to change in 2016. Warren, MI, in suburban Detroit, entered the list of top rent-growth markets in July, and in November leaped into the top 10 among the Axiometrics Top 50 – based on number of units – rising from No. 14 to No.8. 

Warren received some Midwestern company last month, as Minneapolis-St. Paul entered the chart at No. 16. The Twin Cities market has been rising for some time and has the added strength of achieving the highest occupancy among the Axio Top 50, 97.1% in November. 

That high occupancy, combined with just a moderate amount of new supply, is among the reasons for the Twin Cities’ increased rent growth.

The Midwest’s emergence did not detract from the West region’s dominance. Metros west of the Rocky Mountains accounted for six of the seven highest effective rent growth rates, while California had four markets on the chart below. 

Raleigh also entered the chart last month, while Tampa-St. Petersburg and Charlotte fell off. 

Reno continued to have the highest rent growth among smaller markets, while Honolulu went from negative rent growth one year ago to 9.0% in November.

Jay Denton
Senior Vice President
Stephanie McCleskey
Vice President, Research
Main Office: 214-953-2242 
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