Yesterday we took a look at the multifamily industry from the view of institutional capital as discussed at NMHC’s Apartment Strategies/Finance Conference in Dallas earlier this week. Today we are going to dive deeper into the specifics behind the top apartment markets around the country.
From a macro point of view, the industry has high levels of occupancy as empty units from the recession have largely been filled, and rents are still rising fast as a result, says Ron Witten, president of Witten Advisors LLC. Housing starts have picked up, with March being the fourth most active month for apartment starts in 25 years with ground breaking on 28,700 units. Single-family housing starts are projected to hit their normalized annual rate of 1.25 million units in 2014 and 2015, which isn’t necessarily a bad thing for apartments.
“The truth is that home ownership rates are not as relevant to our industry as everyone thinks,” Witten says. “Going forward we will still have a confluence of all the good things with job growth and a young population growth of 500,000 a year. On the supply side, we expect new starts to be strong throughout the year, though rising land, labor and construction costs will put a limit on product volumes going forward.”
As far as local markets go, Witten points out that there is an amazing difference in economic conditions throughout the country. Take, for example, Salt Lake City’s employment growth rate of 4.3 percent, which is three times the U.S. national average of 1.5 percent. Three strong markets (Witten defines a strong market as one that will see at least a 5 percent rent increase in 2013) to keep an eye on are Oakland, Calif., with solid demand, good job growth and a lagging development pipeline; Miami, which has had a tremendous recovery in the housing market with new condos breaking ground (this might be a challenge for bidders, though it is good news for existing owners); and Seattle, where the large supply of units is matched by a tremendous state of demand.
Three sluggish markets that Witten advises to be careful of include Virginia Beach, Va., which has demand challenges; Metro D.C., where developers are building for a demand that isn’t there; and Raleigh/Durham, N.C., which is also demand challenged. But Witten made sure to mention that developers and investors shouldn’t write off these metros completely.
“The reason I describe these markets as sluggish, and not poor, is because we are still having positive rent growth in all three metros, though it is very small, zero point something,” he says.
This notion of even the slowest markets still experiencing growth was reinforced by Greg Willet, vice president of research & analysis at MPF Research, a division of RealPage Inc.
“We have seen two full years with national occupancy hovering around the 95 percent mark,” Willet says. “Three fifths of the 100 markets we track are about as full as they can get at this point. High occupancy translates into rent growth. But the peak of annual rent growth occurred in late 2011 at close to 4.8 percent. Today that has slowed down to an average annual rent growth of 2.6 percent as of first quarter 2013.”
Still, Willet points out that there are several markets currently outperforming that peak average. San Francisco and Oakland, Calif., have rent growth rates of 6.3 percent; San Jose, Calif., is at 5.6 percent; Denver/Boulder, Colo., is at 5.4 percent; and Austin, Texas, is at 4.9 percent.
Willet’s leading markets include Portland, a strong candidate for the nation’s best near-term revenue growth as it benefits from strong job creation and limited construction; Houston, with a strong local economy and new super-luxury rental-tower asset category; and Los Angeles, which while it has a forecast close to the national norm, also benefits from a strong upside potential for great positive revenue growth. His lagging markets include Las Vegas, where rents are still 15 percent lower than pre-recession levels; Jacksonville, Fla., which lacks demand; and St. Louis, which is the odd-market out in the Midwest with its struggling economy.
In spite of a few relatively weak markets, the industry as a whole will continue to see revenues increase over upcoming months and years, especially given the demand created by younger renters and their lifestyle.
“While we have heard about the number of young adults, many living at home, what we haven’t heard much talk about yet is their lifestyle choices,” Willet says. “There are 63 million adults between the ages of 20 to 34 years old, which is up by four million from a decade ago. Nearly 59 percent, or approximately 37 million, have never married. That is up a stunning amount, and translates into a lot of potential renters.”