Apt. Rent Growth Deceleration Sets In

Sacramento continues to lead the US in year-over-year apartment rent increases. (Photo by Tom Myers)

SANTA BARBARA, CA—August saw yet another record high in average US multifamily rents, yet Yardi Matrix’s latest report says the incremental increase from July shows that the anticipated deceleration in growth has begun to take hold, especially in tech markets. The $3 increase to $1,220 marked the eighth consecutive monthly record for apartment rents, according to Yardi Matrix’s monthly survey of 120 markets. However, on a year-over-year basis, the 5.0% increase in rents is down 50 basis points from the previous month, 110 bps from April and 170 bps from Last October’s recent peak. “The deceleration in rents is in line with expectations,” according to the Yardi Matrix report, released Tuesday. “We forecast 4.5% growth for 2016, so if anything, year-to-date increases have surprised on the upside. The slowdown is less cause for concern than the natural byproduct of limits when income growth is between 2% and 3%. In that environment, rent growth can only return to more moderate levels.” However, while overall rent growth is cooling, fundamentals in most of the country remain strong, according to Yardi Matrix. “Occupancy rates have declined slightly, but they remain extremely high across the country. Job growth has slowed a bit, but continues at a pace of roughly two million per year, enough to keep apartment demand generally robust.” By comparison to what the sector experienced late last year and early this year, the number of metro areas with outsize year-over-year rent gains has declined to a small number. However, 18 of Yardi Matrix’s top 30 metros—or 60%—have seen solid growth of between 4% and 7% over the past year. Leading the way, predictably, were three Western markets: Sacramento, which saw Y-O-Y rent gains averaging 11.9%; Seattle (up 9.3%) and the Inland Empire (up 9.2%). The Yardi Matrix report says the recent deceleration has been most pronounced in some technology-centric metros, which are “coming back to earth due to the combination of waning demand and affordability issues in the face of growing supply.” San Francisco saw 12% growth in rents during 2015, but has slowed to 1.6% Y-O-Y through August. Denver’s year-over-year growth rate has fallen to 3.5% in August after rising by 11% in 2015. Other markets that have seen significant deceleration include Austin—up 4.8% Y-O-Y through August compared to 6.9% last year—and Boston, where Y-O-Y growth has slowed to 2.2% from 5.2% in ’15. While neither of these two metros were as frothy as San Francisco or Denver, both are tech-led markets in which growth has declined by about four percentage points in recent months. “Rent growth generally remains solid in much of the country,” according to Yardi Matrix. Many metros in the Sun Belt, Southwest and Southern California are seeing growth of between 5% and 8%. “Fundamentals are strong, and those markets could see continued gains above historical growth rates.” Even slower-paced markets in the East—including Philadelphia; Washington, D.C.; and Baltimore—and the Midwest markets of Kansas City and Chicago are seeing 3% to 5% growth, which Yardi calls “reasonably strong by historical standards in those areas.” The fastest deceleration is limited to metro areas that are seeing a combination of slowing job growth and increased supply, notably Houston, which has had 10,000 units completed year to date, with 15,000 more expected to be completed by year-end. Other examples are Austin (6,700 YTD and 7,700 more by year-end); San Francisco (3,900 YTD and 11,000 more by year-end); Denver (6,200 YTD and 5,500 more by year-end); urban Boston (2,900 YTD and 4,300 more by year-end); and, to a lesser extent, Portland (2,200 YTD and 2,700 by year-end). “These metros will see more moderate growth until this supply is absorbed,” according to Yardi Matrix. Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What’s driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.