There are early signs that the breakneck pace of apartment building may be ready to slowdown as the supply catches up to pent up demand that was spawned by the housing crash. The national occupancy rate repeated itself in June and July while class A and B rental properties had small gains in rental growth, according to Axiometrics Inc., a multifamily research provider claiming to survey every property in its database at the floor plan level, every month.
Still, it may take a quarter or two for the message to reach the street. Despite annual effective rent growth moderating over the last 12 months, the number of new apartment construction starts tends to be increasing across all parts of the country. In its pipeline database, Axiometrics is tracking more than 311,000 units started since annual rent growth turned positive in May 2010. Nearly 74,000 of those units were started in the 15 months from May 2010 to July 2011, which is when rent growth peaked. However, in the 12 months since the rent growth peak, more than 237,000 units have been started.
“Since the tear the apartment market was on in July of 2011, there has been a gradual moderation in both effective rent and occupancy growth, though we are still near historical highs for both,” said Ron Johnsey, president of Axiometrics. “Interestingly, new supply is also just now really starting to hit the market in a big way, so at this point it can’t be faulted for the moderation in rent growth, especially as some markets—like Houston, Southeast Florida, Nashville, and Denver—are actually seeing growth rates higher than they were a year ago. The performance of the apartment market between now and next spring will provide a better idea of how the new deliveries are impacting existing product, as close to 89,000 new units will be delivered between now and April 2013.”
Axiometrics is forecasting full-year effective rent growth of 4.1%. Reaching this rate depends largely on what happens during August and September prior to normal seasonal slowing in the final three months of the year. If the market performs somewhere between how it did during these two months in 2010 and 2011, with rent growth in 2011 being somewhat slower than it was in 2010, Axiometrics reports that full-year effective rent growth could still rise as high as 4.3%.
Going forward, Axiometrics forecasts that the market will likely perform closer to the extended period of stable rent growth seen in the late 1990s, rather than the “up and down” market seen during the immediate last expansion period.
As a group, REIT properties, which account for approximately 12% of the Axiometrics database, continue to outperform the broader national market. REIT properties have grown rents 6.46% YTD, compared to 6.35% over the same period of 2011. However, in 2011 REIT properties lowered rents each month from August to December, thus the July results could be the peak YTD growth rate seen for them the rest of this year.
Duane’s Analysis: With the tendency toward boom and bust in our economy it wouldn’t be surprising to see us overbuild apartments and create a renters’ market. Coupled with a healthier housing market where renters begin to move out to buy homes, a downturn in available work building apartments could be on us by spring of 2013. One potential bright spot might come from the remodeling of existing units, especially class C units which have had the highest year-over-year occupancy growth. Of course, more people buying homes will also spur more home construction.