Steady Growth in the U.S. Apartment Market
As rent growth slows, and some lenders have their fingers ready to hit the pause button, the concerns over an imminent bubble are beginning to fade. With few exceptions, new supply is being absorbed at a healthy clip as demand for apartments remains strong.
Moderation is the word across several apartment market metrics through the first half of 2016. According to MPF Research, annual rent growth slowed somewhat to 4.5%, compared to 4.9% at this time last year. This is still an impressive figure given the duration of the growth cycle, as well as the 15-year average growth rate of 2.4%. Absorption outstripped new supply and occupancy rates inched up 20 basis points to 96.2% after weakening late last year and into the first few months of 2016, exhibiting the continued resilience of apartment market fundamentals.
The recently reported homeownership rate of 62.9% (a 51-year low) from the U.S. Census Bureau bodes well for sustained robust apartment demand. Moderating market fundamentals do nothing but prolong the current cycle, which some analysts peg at 2-3 years at the minimum.
U.S. Apartment Market
The 2016 NAA Income and Expenses Survey revealed that rent revenue collected as a percentage of gross potential revenue was at its highest level since NAA began collecting the data in 2000. Concessions were at an all-time low in nominal terms and net operating income per unit clocked its fifth consecutive year of 5% growth or higher, keeping investor interest high in this asset class in the midst of a slow-growing economy and concerns over global markets, the upcoming elections, and a potential increase in interest rates. New supply continues to come online with markets in Texas, Florida, the Pacific Northwest, and Tennessee augmenting their inventory by 2-3% through the first six months of 2016. Including units under construction, some markets could potentially grow their stock by more than 10% in the near- to mid-term. While the risk of overbuilding is emerging in the luxury sector and some large metro areas, the supply and demand gap persists for mid-tier and workforce housing. In many markets, those sectors are even tighter, reporting higher occupancy rates and higher rent growth.
In mid-July, the Office of the Comptroller of the Currency issued a statement that the agency is “keeping an eye” on commercial real estate lending, following a similar joint statement last December from the OCC, FDIC and the Fed. Banks are becoming increasingly cautious, according to the most recent Fed Senior Loan Officer Opinion Survey. Released in July, a significant (defined by the Fed as 20% to 50%) net percentage of domestic banks reported tightening lending standards for loans secured by multifamily properties. Additionally, net demand for multifamily loans has leveled off over the past three quarters. Although banks are reporting tighter standards, it has yet to manifest itself in the data as multifamily mortgage loan originations are about on par with last year’s near record-breaking levels,according to the Mortgage Bankers Association. There is some anecdotal evidence that construction loans for multifamily properties are slowing down. On the transaction side, however, Real Capital Analytics reports domestic bank loans comprised 31% of total lending activity for garden apartments, and 47% for mid- and high-rise apartments through May 2016.
Concerns over the strength of the labor markets seem to be alleviated after the unveiling of the July jobs report, the second consecutive month of healthy job gains. Over 1.3 million jobs have been added to payrolls to date, which is off from last year’s 1.6 million through the same time period. However, job openings in 2016 have been at their highest levels on record, and many employers report difficulty finding the right workers. A mismatch between the type of jobs available and the type of labor looking for work is inevitable as the U.S. moves closer to full employment. The Fed estimates that a normal, long-term unemployment rate has a range of 4.6% to 5.0%. Wage growth is finally showing some signs of life but remains below historic norms, averaging 2.5% growth year-overyear for the past two quarters. Additionally, Moody’s Analytics’ baseline forecast barely hits 3.0% growth by the end of 2017, still below pre-recession rates.
For more information, please contact Paula Munger, Director of Industry Research & Analysis