U.S. Apartment Market
Even with a large amount of new apartment supply coming online, and with more markets cooling throughout the country, national rents grew moderately through 2017.
According to RealPage, national rent growth clocked in at 2.5 percent through the year. Continuing its growth streak, Sacramento posted the highest rent growth rate at 6.5 percent; however, it was the only metro area that surpassed the 6 percent mark. Las Vegas and Jacksonville followed in rent growth at 5.6 and 5.3 percent, respectively. Considering the numerous metro areas that experienced growth rates in excess of 6 percent two years ago, it’s clear that growth has moderated considerably.
Some effects of last year’s hurricanes are beginning to show up in the form of higher occupancy rates in previously tepid markets like Houston. As displaced households have turned to apartments, metro Houston saw its vacancy rate decrease by 0.7 percentage points to 6.4 percent from the third to the fourth quarter, the third-largest dip among metro areas tracked by Reis.
Markets in Florida such as Jacksonville, Tampa-St. Petersburg and Palm Beach saw much smaller decreases in vacancy.
Deliveries totaled 228,567 units while absorption totaled 222,862 units during calendar year 2017, as measured by CoStar. Although net absorption fell short of deliveries, it was more balanced than 2016 results when deliveries outpaced absorption by 73,117 units.
According to RealPage, the national occupancy rate at the end of fourth quarter was 95.1 percent, identical to the rate at the end of 2016. Similar to the third quarter, the Minnesota Twin Cities still possessed the tightest market in the country with an occupancy rate of 97 percent. The Greater New York City metro area markets of Newark/Jersey City and New York followed at 96.7 and 96.5 percent, respectively. Outside of Minnesota and Greater New York City, all of the major California markets prominently rounded out the top 10.
U.S. Capital Markets
Real Capital Analytics reported a total of $148 billion in closed transactions for apartment properties for the 12 months leading up to November, a year-over-year decline of 8 percent. This was expected given that most higher-yield assets have already been snapped up by investors in the current cycle. As further evidence that 2017 was a moderating year for the apartment market, average price per unit leveled off at $146,070 after seven consecutive years of increases. Just over a million units changed hands, a decline of 8 percent.
Nevertheless, the big investment trend of 2017 was investment dollars favoring rental housing. Among all major transaction types, apartments commanded 31.7 percent of all transaction dollars for the 12 months leading up to September. This was ahead of the office (28.7 percent), industrial (15.3), retail (14) and hotel (6.5) classes.
Given the tightness of the labor market, the lowest level of job growth in six years, at just under 2.1 million in 2017, was largely in line with expectations. Monthly jobs gains averaged 178,000, a decrease from 2016 but well above the 80,000 to 100,000 rate needed just to keep up with growth in the working-age population. The unemployment rate has remained unchanged at 4.1 percent for three consecutive months, its lowest level since 2000.
At the metro level, Southeastern cities were well-represented at the top for percent growth in payrolls (through November), including Raleigh, Orlando and Jacksonville. The Riverside, Calif., metro area took the top spot, with employment growth of 3.2 percent, and San Antonio rounded out the top five. Virginia Beach, Rochester, N.Y., and New Orleans lost jobs during this same 12-month period.
New construction jobs totaled 210,000, a vast improvement over 2016, but well behind the growth spurt experience in 2014 and 2015, when an average of 348,000 jobs per year were created. Even at this improved rate, construction employment would not return to pre-recession levels until 2021.
After surging in the months following the presidential election in 2016, the Index of Small Business Optimism reached a high in this cycle in November. The index, produced by the National Federation of Independent Business, increased to 107.5, the second highest reading in its 44-year history. Eight of 10 index components improved, with respondents highly optimistic about future sales, the environment for expansion and general business conditions.
With uncertainties cleared around tax reform, and long-awaited corporate tax cuts coming to fruition, business investment is expected to pick up considerably in 2018. Whether this comes in the form of spending on plant and equipment, technology or people remains to be seen, but any of those outcomes provide an economic boost to an already-strong economy. Although wage growth has been defying expectations, 2018 may well be the year we finally see supply and demand fundamentals in the labor market manifest themselves in the data through more substantial wage increases.
Growth in the apartment market is expected to continue at much the same pace as 2017. While occupancy rates may witness slight declines in some markets due to new deliveries, we expect it to be short-lived given the sustained demand for rental housing. Overall rent growth is forecast to remain in line with long-term averages in the 2 percent to 3 percent range while any noticeable increases in values will be confined to secondary and tertiary markets.
Paula Munger, Director of Research and Analysis for NAA.