If the multifamily sector were a party, technically it would be over, but there were some latecomers who are just starting to have a good time.
To spell out a metaphor, the latecomers are the smaller markets that are just now enjoying the recovery part of the cycle. “In a break from the overall trend during this recovery, smaller markets led the charge on rent growth during the fourth quarter,” said Ryan Severino in REIS‘ Q4 2015 Apartment Trends report. Severino doesn’t predict the trend will continue but says it does “highlight the changes taking place as the more mature recoveries in larger metros lose some steam.”
Overall for the year, “Apartment rents surged 4.6 percent in 2015, posting the largest gain since before the Great Recession. It’s a good time to be a landlord, but not a renter…” reported Realtor Mag.
The rest of the big picture is a different story. Interestingly, in Q4 alone, rents actually declined, going against the annual trend. Severino points out that three of the six markets that experienced declines in effective rents are “among the tightest, most expensive markets in the country.”
CoStar echoed this fact saying, “Several of the nation’s largest apartment markets, many of which have seen record levels of construction and rent growth far outpacing income gains, experienced rent declines during the fourth quarter of 2015. Most notably, San Francisco (down 1.7%); Washington, DC (down 1.1%); Houston (down 0.5%); Philadelphia (down 0.3%); Seattle (down 0.2%), and Chicago (down 0.2%) all posted fourth quarter apartment rent declines.”
In addition, the national vacancy has increased for two consecutive quarters at the end of Q4. “Simply, the fast pace of rent growth and increased occupancy rates during the past two years were unsustainable,” said Axiometrics’ KC Sanjay in a contributor article for Forbes.
Don’t fret yet. Sanjay goes on to say that, “Continued moderate national job growth, the growing preference toward renting instead of owning, the later age of first marriage and hence childbearing, and student loan debt are among the positive factors supporting the apartment market’s health.”
In December, the top five metropolitan areas for job gains remained the same as November, although the order changed slightly. “New York remained No. 1, while Dallas jumped back up to No. 2, pushing Atlanta and Los Angeles down one spot each to Nos. 3 and No. 4, respectively”, reported Axiometrics. However, annual job growth did slow in 4 of the top 10 markets: Atlanta (-34 bps), Los Angeles (-26 bps), Riverside (-24 bps) and Chicago (-6 bps). Job growth was up by an average of 36 bps in the remaining six top 10 metros, reported Axiometrics.
292,000 new jobs were added in December 2015 bringing total job growth to 2.7 million for the year and marking the “longest streak of private-sector job growth on record” at 70 months, according to the Bureau of Labor Statistics. The unemployment rate was unchanged from November and remains at 5.0% at the end of Q4.
In Atlanta, although Class A vacancy spiked to 9.64% this quarter in urban areas vs. 4.0% a year ago, the general outlook for the Atlanta multifamily market is positive according to Integra Realty Resources (IRR) in the 2016 Atlanta, GA Multifamily Market Report.
Nationally, Severino predicts that the upward drift in vacancy will continue in 2016: “Eventually, rising vacancy rates will take the wind out of landlords’ sails and remove some of their ability to keep pushing rent growth at such a febrile pace. That is not to say that rents at the US level will decline anytime soon, but it will be instructive to watch some of the most expensive markets. If their rental growth rates falter, it will surely depress the overall US data.”
Bull Realty, Inc., Research