Sacramento has been one of the country's tightest apartment markets in recent years.
SACRAMENTO—Nationwide, the percentage of units offering rental concessions is at some of its lowest levels in nearly two decades. Still, some markets–mostly the country's big construction centers–are offering concessions at notably higher rates, according to a study by RealPage.
After peaking at 65.8% in fourth quarter 2009, the percentage of stabilized apartments in the US offering concessions has been on a steady downward trajectory. As of second quarter 2019, concessions were available in only 14.1% of apartments, one of the lowest rates the market has recorded since mid-2002. Concession rates fell below the 20% mark in second quarter 2017 and have remained beneath that threshold since that time, says the study.
Some markets, however, are still commonly awarding concessions in a sizable portion of stock. These big concession markets have been some of the nation's most prolific supply centers during the current economic cycle. Also, while it's relatively rare for concessions to be offered in class-B or -C units, the markets with the most discounts overall logged inflated concession rates in these lower-tier product lines.
The markets with the most concessions were in Houston and San Antonio. This was followed by the next tier of concession rates, where discounts were reported in about 20% of apartments in Kansas City, St. Louis and Dallas. Among these, St. Louis was the only market that didn't have its apartment base expand ahead of the national average in the current economic cycle. However, St. Louis did gain fewer than 12,000 units in the past nine years–one of the smallest total volumes nationwide. These units increased the relatively modest inventory base by just 7.4%. Performance struggles in St. Louis are tied more to the local economy than to competition from supply.
Dallas has been the nation's busiest market during the cycle, having nearly 125,000 units deliver, increasing the large existing base by 24.6%. Kansas City's stock swelled by 15.1%.
On the other hand, some big markets are offering barely any concessions. Some of the smallest rates nationwide were recorded in Providence, Riverside/San Bernardino, Sacramento, Minneapolis/St. Paul and Boston, with discounts on only about 5% to 7% of apartments. For the most part, these have been slow-growth markets during the current cycle, adding new supply at a rate that increased the existing stock by roughly 4% to 6%.
"Sacramento has been one of the country's tightest local apartment markets in recent years," Greg Willett, RealPage chief economist, tells GlobeSt.com. "Occupancy has been running at roughly 96% or better since the middle of 2014. Today's occupancy figure is 96.7%. Lower-priced class-C product is in especially short supply, with occupancy at 98.3%."
Of course, such limited product availability gives way to substantial rent growth. Current annual rent growth for new leases comes in at 4.9%, notably above the US average of 3.1%, Willett says.
"Looking back over the course of this economic cycle, rents in Sacramento have climbed 49.5%, compared to the U.S. average of 34.6%," he tells GlobeSt.com. "Any discounting of rents is rare. Only 6.3% of the product with stabilized occupancy–meaning brand new completions still in the lease-up process are excluded from the calculations–have any rent giveaways. The introduction of rent control here will discourage discounts in the future. Concessions occur when the stock of available product gets a little bigger than ideal for a specific product niche or at a specific price point. Owners and operators aren't going to solve a temporary challenge in a way that will limit future revenues over the long term."
Minimal construction in recent years is a key factor in Sacramento's high occupancy and substantial rent growth, Willett says.
"Annual completions of market-rate product have been limited to about 1,000 units annually in the recent past," he tells GlobeSt.com. "There are some 2,500 units under construction now, so a little more product is going to be available in the near term."
RealPage forecasts call for continued jam-packed full occupancy during the next couple of years. Annual rent growth is anticipated between 2% and 3%, still surpassing what's expected for the nation as a whole but not at the levels sustained locally of late, GlobeSt.com learns.
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
