Rents Are Growing, But at a Subdued Pace
Asking and effective rents rose by 0.5 and 0.6 percent, respectively, during the first quarter. While these are decent growth figures, it should be noted that this is the slowest pace of growth in rents in the last 12 months, and depending on the neighborhood it is increasingly obvious that landlords are finding it difficult to raise rents by over 5 to 10 percent. Every single submarket that Reis covers now displays effective rent levels that exceed their highs from 2008, before the downturn pummeled the sector. With median wages not rising appreciably, unless the apartment complex caters to the top 1 percent of income earners it will be more of a challenge for landlords to raise rents moving forward. 2014 is going to be an interesting year, with Reis projecting effective rent growth to be slightly stronger versus 2013, but mainly because we are expecting an influx of new apartment units priced at a premium to bump up average rent levels over the period.
Demand for Apartments Remains Resilient
Over 130,000 units came online in 2013, slightly above the 113,000 annual average from 2000 to 2012. Clearly this was not enough to reverse the downward trend in national vacancies, but what about 2014? We were off to a slow start in the first quarter, which is not atypical. But from our observations of the pipeline for the year we are looking at close to 180,000 units opening their doors. If this materializes, this will be the highest level of new completions since 1999 – back then, vacancies were below 4 percent and effective rents grew by over 8 percent.
Now the picture is a bit more mixed. Vacancies are continuing to tighten, at least for the first quarter. But rents aren’t growing as much, for reasons already mentioned. Most of the new properties being developed are Class A buildings and will want to charge a premium over the market average, bumping up rent growth for 2014, but from a same store basis this amount of new supply presents competition that may further dampen the ability of landlords of existing buildings to raise rents. As supply growth ramps up in response to tight multifamily fundamentals, we expect more of a moderation in vacancy trajectories. We expect it to rise slowly, but remain in the 4s and perhaps hit 5 percent by the end of our five year forecast period. In other words, we are not predicting a deterioration in multifamily fundamentals – as supply and demand dynamics balance out we would simply advocate questioning the most sanguine of projections more closely. Demand for apartments will remain robust even as the single-family for-sale market recovers, but expect continued outperformance to moderate in the near term.
The strength of the apartment market remains broad-based and pervasive, despite decelerating rent growth. All of this stands in stark contrast to property types like the office and retail sector, which are going through a far more limited and concentrated recovery, driven only by a handful of markets. Rents continue to grow fastest in the markets with the best underlying metro-level economies. San Jose, San Francisco, Seattle, and Oakland-East Bay, all markets heavily influenced by the booming technology sector, were the top four markets ranked by effective rent growth over the last 12 months. Effective rents in these markets increased by at least 5% in the past year.