IRVINE, CA—The apartment sector has enjoyed the strongest and most consistent recovery since the recession. One fallout from the housing bust was a massive decline in homeownership, resulting in a surge in apartment absorption, as people shifted from owning to renting. The surge in demand resulted in plummeting vacancies and surging rents, even as demand in other property segments struggled in the face of the sluggish economic recovery, whetting investor appetite.
Coupled with a steady fall in interest rates, the result has been 74 consecutive months of double-digit annual growth rates in US apartment pricing per the Moody's CPPI. This has been reflected in cap rates, which continued to fall in the fourth quarter to 5.6%, per Real Capital Analytics data.
However, there are reasons to be skeptical that this robust pricing environment can perpetuate, as there are multiple risks cropping up that pricing has not adjusted to reflect. The first is the rise in interest rates. Interest rates appear to have bottomed for the cycle at the end of 2016 and appear set to head higher as inflation expectations are rising, wage growth is solid and the Fed is poised for further tightening.
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