NAA Industry Insider: Two Reasons Why Apartment Rent Hikes Are Slowing | National Apartment Association

NAA Industry Insider: Two Reasons Why Apartment Rent Hikes Are Slowing

June 24, 2014


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Two Reasons Why Apartment Rent Hikes Are Slowing
Digested From "Apartment Rent Hikes Are Slowing — Finally"
MarketWatch (06/17/14) Hoak, Amy

CoStar Group reports that apartment rent hikes are finally beginning to slow due to two main factors. The first is the increased supply of new rental units on the market. Hans Nordby, managing director of CoStar, comments, "The first quarter of this year, 54,000 new apartment homes were delivered to the market [nationally] and demand was about 27,000 apartments. That causes vacancies to pick up a bit." He adds that increased vacancies mean that apartment owners and managers cannot be as aggressive in hiking rents if they want to keep their apartments filled. Of course, not all markets are the same. Rents could continue to rise sharply in those areas with short supply.

In other markets, the supply-and-demand imbalance could lead to rent decreases as early as this year. One such place is Washington, D.C., where Nordby confirmed there is a "torrent of new supply," yet employment growth momentum has been sluggish. Such other submarkets as Seattle's Lake Union area, Charlotte's Uptown neighborhood, and downtown Chicago also have a lot of new apartments coming on the market. Reis Inc. senior economist states that the second reason hikes are slowing is that "some rents have gotten so egregiously expensive, it puts an artificial ceiling on rent growth. When rents are rising faster than incomes, there comes a point when residents simply cannot stomach any further "meaningful" rent increases, Severino concludes.

Market Trend Insights

Which Apartment Stat Recently Hit a Six-Year Peak?
Digested From "Apartment Occupancy Hits Six-Year Peak" (06/19/14) Bubny, Paul

Axiometrics recently released data showing that the nation's apartment occupancy reached 95 percent as of May -- its fourth consecutive month of improvement. The firm started tracking apartment data on a monthly basis in April 2008. This marked the first time since then that occupancy had topped the 95 percent mark. Axiometrics previously tracked data on a quarterly basis. According to Stephanie McCleskey, the firm's director of research, "the second quarter of 2001 was the last time the market was at 95 percent for a quarter. It's a pleasant surprise, because it's coming at a time when new supply is flooding the market." Nationwide, approximately 180,000 new apartments have come on line in the last year. Absorption has been high, though, and the effect on both rent growth and occupancy has been positive. Axiometrics states that effective rent growth was up 3.7 percent year-to-date in May. Jay Denton, Axiometrics' vice president of research, notes that five of the top 10 metro areas for annualized effective rent growth were in Northern California. They included: Napa, up 12.26 percent; Vallejo-Fairfield and Santa Rosa-Petaluma, both up 10.26 percent; and Oakland, which registered a 9.97 percent improvement. Odessa, Texas, was the top metro area for annualized effective rent growth, just as it was the previous two months.

Housing Recovery Falters: An Opportunity for Apartments?
Digested From "Housing Falters as Forecasters See U.S. Sales Dropping"
Business Week (06/20/14) Howley, Kathleen M.

The two-year-old U.S. housing recovery is flagging, a troubling development that now is being acknowledged in industry forecasts. The Mortgage Bankers Association (MBA) has lowered its outlook for new and existing-home sales forecast for the current year to 5.28 million, down 4.1 percent in what would represent the first annual drop in four years. In addition, the group slashed its projection for purchase mortgages by 8.7 percent to $751 billion -- the first drop in three years. Bullish forecasts in the first quarter from not only MBA, but also Fannie Mae and Freddie Mac, have been nullified by climbing property prices and an economy that simply is not generating higher-paying jobs. The Conference Board states that the share of Americans who said they plan to purchase a house in the next six months sank to 4.9 percent in May from 7.4 percent at the end of last year -- the highest in records dating back to 1964. It now appears the best-qualified home buyers made their purchases last year when mortgage rates were at near-record lows after delaying their moving plans during the housing bust, reports IHS Inc. chief economist Nariman Behravesh. Meanwhile, the median price of a resale home rose 11.5 percent in 2013, reports the National Association of Realtors. With prices up, the ability of Americans with stagnant wages to purchase residences wanes.

Two Factors Are Convincing Homeowners to Rent Out Their Houses
Digested From "More Homeowners Becoming Landlords"
CNNMoney (06/17/14) Christie, Les

Low mortgage rates coupled with sky-high rents are convincing more and more homeowners to rent out their former residences when they trade up rather than sell them. According to Redfin, 19 percent of current homeowners either bought or refinanced homes between 2011 and and last year -- when 30-year mortgage rates were less than 3.4 percent. Rents have increased by nearly 20 percent nationwide since mid-2006, while home prices remain nearly 21 percent below what they were at that time. Renting helps soften the blow for many people who are still upside-down on their home loans and unable to profit from a sale. At the same time, there are some disadvantages to becoming a landlord. Not only are owners on the hook for any repairs that need to be done, they also have to deal with often demanding tenants and cover expenses even when the property is vacant. Most landlords are benefiting from the move, however, although it may be hurting the housing market. The trend means fewer homes going on the market which, according to Redfin CEO Glenn Kelman, is "a major reason we have low inventory and limited sales growth."

Rocking the Walking: Millennials Drive New Urban Spaces
Digested From "Rocking the Walking: Millennials Drive New Urban Spaces"
USA Today (06/17/14) Toppo, Greg

George Washington University researchers have released a report identifying 558 WalkUPs (Walkable Urban Places) in America's 30 largest metro areas. In these neighborhoods, there is a premium on walking rather than driving; and it is drawing more and more Millennials. In such cities as Boston, New York, and the District of Columbia, such places account for more than 33 percent of office and retail space. At the other end of the spectrum, WalkUPs comprise only 5 percent to 6 percent of office and retail space in such Sun Belt cities as Orlando, Tampa, and Phoenix -- all three of which remain built around automobiles. However, the research suggests that this is rapidly changing. A handful of major U.S. cities, including Miami and Los Angeles, "are making some surprising and unexpected shifts toward walkable urban development," the researchers noted.

Walkable neighborhoods are defined as those where such everyday destinations as apartments, condominiums, offices, schools, stores, and places to eat are concentrated and within walking distance. In future decades, the researchers forecast, new urban dwellers will likely push for "tens of millions" of square feet of walkable space and "hundreds of new WalkUPs." George Washington University researcher Christopher Leinberger, head of the school's Center for Real Estate and Urban Analysis, states, "It's the kids. It's the Millennials . . . that are driving this." He credits Hollywood for the shifting of the gears as such shows as "Sex in the City" and "Two Broke Girls" are set in "safe, walkable, urban places. This is a reflection of the aspirations of the Millennials."

New-Home Construction Slides 6.5 Percent in May
Digested From "New-Home Construction Slides 6.5 Percent in May"
Associated Press (06/18/14) Boak, Josh

With many Americans struggling financially, residential builders broke ground on fewer new homes last month. Housing starts hit a pace of 1.01 million units in May on a seasonally adjusted basis, according to Commerce Department data. The tally reflects a 6.5 percent drop from April's activity -- significantly more than the 3.7 percent decline economists had predicted. Home building flagged in the Northeast, Midwest, and West but expanded in the South. New-home construction is up 9.4 percent from May 2013, Commerce notes, but most of the gain can be attributed to apartment projects -- which suggests that Americans are leaning toward renting rather than buying. Not only are interest rates and residential property prices on the incline, the nation's workers are still dogged by flat income growth and job insecurity, making it difficult to amass a down payment.

Deals and Transactions

Fannie and Freddie Seeing More Competition on Multifamily Loans
Digested From "Fannie Mae and Freddie Mac Seeing More Competition on Multifamily Loans"
NuWire Investor (06/16/14) Anderson, Bendix

Fannie Mae and Freddie Mac lenders have stepped up the competition with banks to finance apartment communities. Banks have proven more than willing to make permanent loans to apartment owners at extremely low interest rates. To keep up, lenders at the two government-sponsored enterprises (GSEs) are offering the lowest rates they can along with faster service. Nevertheless, the competition continues to cut into Fannie Mae's multifamily lending business. In 2013, federal regulators ordered the two GSEs to limit their lending to apartment communities, contending that agency lenders had become too dominant in the multifamily housing sector. Although the watchdogs appear to be less demanding this year, competitive pressure has picked up where they left off. Through the first five months of this year, Fannie Mae's multifamily lending business totaled just $6.0 billion -- less than half the $13.6 billion in multifamily loans that Fannie Mae closed and sold to bond investors from January through May of 2013. The shrinking volume has had a surprising side effect in the form of lower interest rates for apartment loans. Fannie Mae and Freddie Mac currently have fewer multifamily loans to turn into bonds, which means bond investors are now having to vie for the limited supply. In the process, they are paying higher prices and accepting lower yields.

Where Is TIAA-CREF's Latest Apartment Big Buy?
Digested From "TIAA-CREF Inks Another Big Buy From The JBG Cos."
Washington Business Journal (06/22/14) Sernovitz, Daniel J.

TIAA-CREF has bought another major apartment community from The JBG Cos. after paying more than $170 million for JBG's Louis at 14th/U in Washington, D.C., earlier in the month. This time, the New York-based financial services firm has purchased JBG's The Woodley, a 212-unit apartment community near D.C.'s Woodley Park Metro subway station. Terms of the deal were not disclosed. According to local analysts, the sale appears to play into a push by TIAA-CREF to diversify its holdings in and around the nation's capital beyond traditional commercial real estate. also recently acquired the Plaza America Shopping Center in Reston for $97.5 million. Furthermore, the sale highlights JBG's strategy of selling its apartment assets once it has created sufficient value in them to move on to other projects. JBG developed The Woodley with the CIM Group as one of the first high-end, high-rise apartment developments in Washington's popular Woodley Park area. It features such amenities as a 24-hour concierge, a fitness facility, and a pet-grooming area. As with the Louis at 14th, JBG decided to sell The Woodley before the first of its residents even moved in. In doing so, the Maryland-based developer avoided triggering a Washington city law that would have required it to give residents the right to make their own offer to purchase the property.

Industry Buzz

Buying Into Solar Power, No Roof Access Needed
Digested From "Buying Into Solar Power, No Roof Access Needed"
New York Times (06/20/14) Cardwell, Diane

The concept of community solar gardens is growing in credibility among apartment owners and residents who prefer clean energy. In such an arrangement, customers buy into a solar array built elsewhere and get credit on their electricity bills for the power their panels generate. The arrays create a new market for developers from the approximately 85 percent of residential customers who can neither own nor lease systems because their roofs are physically unsuitable for solar or because they do not control them. A developer builds a solar farm and sells the electrical output of a set number of panels to each customer, based on how much of their power consumption they want or can afford to offset. Customers then receive a credit for that power, often at a fixed rate per kilowatt-hour, that is deducted from the energy portion of their electric bills.

Advocates say the systems offer flexibility for customers because their interest in the panels is transferable so they can carry the output with them if they relocate or turn it over to someone else. The Solar Energy Industries Association reports there are at least 52 such projects in at least 17 states, and at least 10 states are encouraging development via policy and programs. Also encouraging proliferation is the U.S. Energy Department, which published a guide to best practices in 2010 and is considering proposals to award $15 million in grants to help design community projects.

Where in Boise Is Apartment Building Booming?
Digested From "A Good Time for Apartment-Building in the Treasure Valley"
Idaho Statesman (06/18/14) Berg, Sven

Large apartment communities are planned in four locations around Boise's Lusk Street Neighborhood that will add 541 rental units once completed. Planning experts say people living in those apartments would create a natural demand for retail stores, restaurants, and such services as cleaners and florists. For years, this part of the city has been "sort of a no-man's land" in that it is neither fully industrial nor has it been a hub for office or retail space. "Up until this point, there hasn't really seemed to be a clear vision for what the future of this neighborhood was going to be," states Anthony Harding, a Boise State University student who writes the Boisetopia blog. But the college added about 1,000 students between 2003 and 2011. Boise State plans "to have managed, measurable growth over the next five years," states spokeswoman Kathleen Tuck -- growth that has prompted residents to develop their own plan for the neighborhood. City officials gave the green light last fall to a plan that "envisions the continued evolution of this area as a mixed-use urban downtown neighborhood" and "a pedestrian- and bicycle-oriented mixed-use storefront sub-district that provides an eclectic mix of retail services for residents and visitors to the area." The coming boom around Lusk Street is part of a larger building boom across Idaho's Treasure Valley where developers have been infatuated with apartments for two years now.

Legal/Legislative Did You Know

New Yorkers Express Anger as Board Rejects Rent Freeze
Digested From "In New York City, Renters Howl in Anger as Board Rejects Rent Freeze"
Los Angeles Times (06/24/14) Susman, Tina

In New York, the nine-member panel that determines how much owners can raise costs of the city's 1 million rent-stabilized apartments approved a historic low increase of 1 percent for the next fiscal year. However, in a June 23 meeting, it did not give residents the rent freeze they demanded. The panel, which is appointed by the mayor, also signed off on an increase of 2.75 percent for two-year leases of rent-stabilized units. These increases go into effect this October. Hundreds of residents carrying signs calling for no increase erupted in anger. The proposal passed by a 5-4 margin, and the final agreement pleased few. Residents and even some board members had advocated either a rent freeze or a rent rollback, contending that apartment owners have reaped the rewards of decades of yearly rent hikes. "Year after year, even when they didn't merit increases, they got increases," lamented board member Sheila Garcia. Meanwhile, apartment owners counter their property taxes and the costs of maintaining their buildings have increased and that the 1 percent and 2.75 percent increases would not be sufficient top cover utilities, water, and other costs.

Mich. Family of Five Files One Big Suit Over Two-Bedroom Unit
Digested From "Couple With Three Children Sues Apartment Complex After Lease Was Denied" (06/16/14) Harger, Jim

A Michigan couple with three children and the Fair Housing Center of West Michigan are suing Burton Ridge Apartments, claiming the Grand Rapids-based luxury community violated state and federal anti-discrimination laws when they were denied a lease for a two-bedroom apartment. Jeffrey and Jill Panian and the housing advocacy group have filed suit in federal court against Lambrecht Associates, which manages several apartment communities in the Grand Rapids metro area. As of press time, the firm had yet to filed a formal response to the lawsuit. In their complaint, the Panians acknowledged that they were welcomed at Burton Ridge in June 2013 when they toured the newly renovated community without their kids and were offered a two-bedroom unit. A Burton Ridge property manager accepted their deposit check and told them, "It's yours," according to the complaint. When the Panians told the same manager they had three children -- ages 6, 4 and 1 -- during a follow-up visit, he became "immediately hostile," the lawsuit claims. He informed them that the community had a policy that limited occupancy to two children and two adults per two-bedroom apartment. "If you do not like it, you can sue us," the family claims they were told. According to the suit, "testers posing as married and single women with more than two children were told that they were unable to rent a two-bedroom unit per operation of the owner's maximum occupancy policy, which capped the number of children who could live in a two-bedroom unit at two." The Panians and the Fair Housing Center claim the Lambrecht Associates policies violate state and federal fair housing laws and anti-discrimination laws are asking for unspecified damages due to "economic loss, humiliation, emotional distress, and the deprivation of their housing and civil rights." The Fair Housing Center is asking for punitive damages and recovery of its costs associated with its investigation.

Fayetteville, N.C., Tries to Shut Down Apartments
Digested From "Fayetteville Tries Again to Shut Down Apartment Complex"
Fayetteville Observer (NC) (06/19/14) Woolverton, Paul

In North Carolina, Fayetteville officials are mounting a second effort to shut down the former Cambridge Arms apartment community, because crime there has increased despite the installation of court-ordered security measures in 2013. SRC Cambridge Arms Inc., owner of the newly named Barrington Place Apartments, denies that crime has worsened despite the fact that there have been two double murders on the property since the first of the year. "It's our contention that we have exceeded all of the requirements of the order," commented Ashley Huffstetler Campbell, an attorney for SRC. City officials disagree. "Whatever action the property owner is taking, it's not working," remarked James C. Thornton, the Raleigh-based lawyer representing the city in this case. Thornton recently filed a motion in Cumberland County Superior Court that charges Barrington Place with being in violation of the May 2013 order. The motion petitions to close the apartment community and prohibit anyone from using the site again as an apartment community. Barrington Place holds the distinction of being one of the oldest and biggest apartment communities in the Fayetteville-Fort Bragg area, containing 694 rental units on 44.59 acres. A shutdown would force its 600-plus residents to find new housing. The city filed a nuisance abatement lawsuit against the apartment community in the spring of 2013, citing numerous reports of drive-by shootings into homes, home invasions, robberies, assaults, drug dealing, and other incidents.

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