The apartment housing industry’s sentiment so far in 2016 is best described as “cautious exuberance.” The exuberance is fueled by five straight years of performance well exceeding expectations.

The caution is driven by the now-nagging question: How much longer can this possibly continue? As such, it’s natural (and perhaps appropriate) to risk overanalyzing recent trends in the search of a possible inflection point – any indicator that perhaps the market is slowing.

So when apartment absorption in Q1 came in a bit below the norm, it made some noise. That brought increased importance to the month of April, the start of the peak leasing season, when operators and owners sign the bulk of their leases. Would softened demand persist?

With April in the books, the answer is that the U.S. apartment market retained its “bull market” status – at least for now.

Lease-Transaction Data Shows Strength

Examining preliminary results from actual rent roll transactions for millions of units serviced daily by RealPage, MPF Research found all the key vital signs remained healthy. Lease application volumes (measured on a same-unit basis) in April 2016 trended slightly upward compared to April 2015. Occupancy ticked up 20 basis points year-over-year.

Retention rates – which have been at record highs – finally came down a bit. That had been expected with so much new supply hitting the market, pulling some renters out of existing top-tier properties. And the overall renewal retention rate of 52.2 percent in April was still quite high relative to the norms. On top of that, even with more leases not getting renewed, backfilling wasn’t an issue. The average unit sat vacant 24 days between leases, unchanged from a year ago.

Nationally, rent growth levels also remained strong. Combined lease trade-out (the purest form of rent growth, measured on a lease-over-lease basis for both new leases and renewals) in April 2016 came in at 5.6 percent, up 30 basis points in the same-store dataset. New lease rent trade-out registered at 6.3 percent (up 30 basis points), while renewal trade-out measured 4.9 percent (up 20 basis points).

All this is encouraging for apartment investors and managers. But let’s put all the exuberance aside for a minute and remind ourselves that caution is still justified. April is an important month, but it’s still just one month. Monthly data can be volatile, so let’s see how the next few months play out.

Houston, Denver, San Francisco Cooling

Additionally, while the national numbers look great, we are seeing definite signs of cooling in certain markets. This includes non-surprises like Houston and Denver, which we addressed at length in our April webcast. And it also includes the Bay Area. The nation’s hottest apartment market for this cycle has now recorded several months of easing rent growth numbers. While it remains an above-average performer, it’s coming down to earth.

Barring a recession, none of the oft-cited headwinds (affordability, supply, etc.) are formidable enough to bring an end to the good times for the apartment sector as a whole. Occupancy and rent growth levels are expected to soften from the historic highs, but remain in good shape.
A forecast for more separation between market segments continues. Bank on the urban Class A group to remain a laggard over the next few years.

Jay Parsons is Vice President, MFP Research, a subsidiary of RealPage Inc.