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November 2017 Market Trends

Rent-Growth Rise Bucks Typical November Trend

Tuesday, December 12, 2017

 

Stability remains the key theme for the U.S. apartment market as annual rent change clocked in at 2.3% in November 2017. That rate landed in line with October’s 2.1% increase. It also matched the long-term average and was close to the forecasted 2017 average rent growth. 

November’s 2.3% rent growth also was essentially the same as that of November 2016 – the first time since October 2015 in which the rate was not significantly lower than the corresponding month of the previous year. Such stability is not surprising, given that many of the same trends remain in place – namely, record levels of new supply coming as job growth is flattening in an economy near full employment.

 

IN THIS ISSUE

November Occupancy Drops Less Than Usual

Smaller Sister Markets Outperform

A New No. 1 for Metro-Level Rent Growth

annual effective rent growth chart

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Meanwhile, a new metro has overtaken long-running leader Sacramento for the top rent growth market in November. But the change atop the metro-level leaderboard didn’t account for the small, 21 basis point (bps) increase in the nation’s annual rent growth performance from October to November. Instead, that bump appears driven by Houston, which has the bittersweet standing of being the market with the fastest-growing performance, despite the bulk of that lift resulting from tragedy. 

As residents continue to rebuild from the devastation of Hurricane Harvey in late August, Houston’s annual effective rent growth was 4.2% in October, some 138 bps higher than October’s 2.8% and a whopping 797-bps rise from the -3.8% of November 2016. Last month’s rent growth was the highest since the 4.6% of February 2015, just as the oil-price freefall was starting to affect the apartment market. 

Houston’s November occupancy rate of 94.7% was the highest since September 2015, and the concession rate has dropped from 1.8% in August, pre-Harvey, to 1.3% in November. Absorption rates for properties in pre-lease was above 20 units per property per month in September and October, the first month passing that milestone since August 2015.

 Houston apartment market chart

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Tens of thousands of units in the Houston area are still out of commission as a result of storm damage and destruction, so the influx of renters looking for apartments after Harvey had fewer choices. Since they had to move fast to have someplace to live – some temporarily as they decide whether to repair or rebuild a flood-damaged single-family home – landlords were able to raise rents.

The other apartment market most affected by Harvey, Corpus Christi, also has realized improved performance in the ensuing months, just not to the degree of Houston’s rise. Negative rent growth was recorded for 16 straight months from May 2016-August 2017 before climbing to 2.0% in November. Like Houston, Corpus Christi’s performance was slowly rebounding from its low before Harvey struck; the storm’s after-effects simply accelerated the growth.

Chart of Corpus Christi rent growth

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November Occupancy Drops Less than Usual

The national occupancy rate typically declines from October to November, and this year was no different. And, while the November 2017 occupancy rate of 94.6% was 6 bps lower that that of November 2016, the October-to-November decline of 13 bps was the lowest for that period since the Great Recession ended.

A decline in occupancy was expected, given that the fourth quarter of the year is a seasonally slow leasing period and that massive amounts of new supply are being delivered this quarter. However, a slower pace of decline than in previous years reflects the underlying stability of the market. One metric of note: The November occupancy rate has not been higher than 94.9% during this decade.

National occupancy rate chart

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Minneapolis-St. Paul regained the No. 1 position for occupancy among major apartment markets, with a November rate of 97.0%. Nassau County-Suffolk County, NY (Long Island), which held the lead for the previous two months, ranked second at 96.7%, followed by Long lsland’s neighbor to the west, New York, at 96.4%. 

Meanwhile, year-to-date effective rent growth continued on its downward slope. November's YTD rate of 2.9% marked a 38-bps decline from October’s rate. It was also 110 bps below the November post-recession average of 4.0%. 

National YTD effective rent growth chart

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YTD rent growth vs. Post-Recession average chart

 

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As of November, 2017 would record the lowest YTD rent growth of any post-recession year. But the gap between this year and last year has narrowed to 13 bps, and the November 2017 rate was just 24 bps lower than the November 2013 figure. 

 Year-to-date effective rent growth chart

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Smaller Sister Cities Outperform  

Look at the names on the list of top-performing metros at the end of this newsletter. While you’ll see some big names such as Houston, Phoenix, Denver and Los Angeles, you won’t see New York, Dallas or Seattle. What you will see are smaller markets adjacent to those three that are outperforming their big brothers.  

Take New York and neighboring Nassau County-Suffolk County (i.e. Long Island), for instance. Although New York typically gets the bulk of attention (understandably so, considering the market’s size relative to Long Island), Nassau-Suffolk’s performance has been worthy of discussion.

Long Island has averaged 3.8% annual rent growth since January 2015. While that is a good-but-not-elite performance nationally, it’s an impressive 250 bps higher than New York’s 1.3%. Like New York, Long Island has been an exceptional market in terms of occupancy, averaging 96.7% since January 2015 and recently has been in a tight race with Minneapolis-St. Paul for the top occupancy among major markets.

New York/Long Island rent growth

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New York/Long Island occupancy chart

 

 

 

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This David and Goliath story isn’t just isolated to New York and Long Island.

Dallas often finds itself in the spotlight within North Texas, but neighboring Fort Worth actually has been the star performer over the past three years. Since January 2015, Fort Worth has averaged a robust 5.7% annual growth, compared to Dallas’ 4.6% (which is still an enviable rate for most markets during that time). Fort Worth has also been able to maintain higher occupancy than Dallas: 95.4% compared to Dallas’ 95.2%.

DFW rent growth chart

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DFW occupancy chartDFW Occupancy chart

 

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We can find another prime example in the Pacific Northwest by looking at Seattle and Tacoma.

Seattle has been an undisputed success story over the past three years, averaging 6.3% annual rent growth. Occupancy has remained above that 95.0% golden mark generally considered to be “fully-occupied” for a market.

But, believe it or not, Tacoma has actually outperformed its neighbor in rent growth and occupancy over the past three years. Annual rent growth has averaged a remarkable 8.3%, and occupancy has averaged an equally impressive 96.4%.

Seattle-Tacoma effective rent growth

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Seattle-Tacoma occupancy chart

 

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What might be causing the discrepancy in market performance between these marquee-name markets and their lesser-known neighbors? There are a few potential explanations.

In most of these “secondary” markets, inventory growth has been significantly less than their counterparts.

For instance, Dallas has averaged 3.4% inventory growth over the past five years, while Fort Worth has only averaged 1.7%. Seattle inventory growth (2.8%) has overshadowed that in Tacoma (0.8%) substantially. While New York’s 0.8% growth is not all that much greater than Long Island’s (0.5%), New York’s existing stock is so much greater than Long Island’s that the 30 bps difference has a huge impact.

The ultimate implication with these inventory growth numbers is that there is less new supply – both on an absolute and a relative basis – in Long Island, Fort Worth, Tacoma, and Warren than their larger counterparts. In turn, this lower supply growth has a positive impact on rent growth.

Also, it should be noted that average job growth for the past five years in these adjacent markets compares favorably to the primary market.

New York (2.1% annual job growth) has been slightly greater than Long Island (1.4%). Seattle (2.9% annual job growth) only slightly outpaced Tacoma at 2.7%. The only real exception among these examples is Dallas’ blistering 3.8% annual job growth over the past five years, which has outperformed Fort Worth (2.1%) by some margin.

New York (2.1% annual job growth) has been slightly greater than Long Island (1.4%). Seattle (2.9% annual job growth) only slightly outpaced Tacoma at 2.7%. The only real exception among these examples is Dallas’ blistering 3.8% annual job growth over the past five years, which has outperformed Fort Worth (2.1%) by some margin.

Sister markets job growth table

Sources: BLS; Axiometrics, a RealPage company

The takeaway from a job growth perspective is that even though the primary market has far larger employment bases, it is not exactly as though job growth in the smaller neighboring markets has been detrimental.

To use an age-old axiom in the real estate industry, location certainly does matter. And while not every company’s strategy best aligns with locating in adjacent markets such as these, it should also not be discounted either, as there is potential there for success on a property-by-property or a portfolio-by-portfolio basis.

A New No. 1 for Metro-Level Rent Growth

After 20 months as the undisputed effective-rent-growth leader among major markets, Sacramento has surrendered its title belt. Orlando was the winner in November, as October’s fourth-ranked contender jumped past Jacksonville and Las Vegas. Meanwhile, California’s capital fell all the way down to No. 5.

Orlando took the No. 1 spot with rent growth of 5.7%, the lowest leading rate in more than seven years. Job growth in the city of Walt Disney World and Universal Studios was 3.0% in October, below the rates of one year ago, but double the national rate.

While demand is high in Orlando, so is supply. Some 2,428 new units are identified for delivery in the fourth quarter for 2017, and 2,768 more in the first quarter of 2018 – some 40.8% of Orlando’s identified 2018 total of 6,773 units. Demand will need to continue to be high for the Magic City to keep rent growth high.

Apartment industry insiders are bullish on Orlando. The most recent “Market Momentum” survey compiled by the National Apartment Association and RealPage found that those surveyed ranked Orlando the metro most likely to receive increased investment. The respondents had Orlando No. 2 among markets most likely to experience increased rent growth.

Sacramento’s fall from the top of the perch shouldn’t be surprising, given the way the market has been moderating this year. Sacramento’s rent growth was 11.7% when it wrested first place from Portland, OR in March 2016 and climbed as high as 12.3% in July 2016.

Moderation has occurred since then, slowly at first and then more rapidly. Rent growth fell below double digits in January 2017, and has lost almost 5 full percentage points this year. November’s 5.1% rent growth was Sacramento’s lowest since the 4.8% of March 2014.

Top effective rent growth metros

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