Western Markets Dominate Rent Growth

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For months, western markets have led the nation in year-over-year rent growth, according to Yardi Matrix’s monthly rent survey. From Seattle to San Diego, many tech-driven, Millennial-attracting markets have experienced continuous rent growth above previous averages.

Sacramento, in particular, has led the way, as growing demand is met with limited existing stock and low supply growth, forcing annual rent growth above 10 percent in recent months. Overall rent growth in the California capital fell back into the single digits in February for the first time since June 2016, and sits at 9.4 percent on a year-over-year basis in March. Strong gains in education and health services employment (4.2 percent) and professional and business services employment (4.3 percent) support the outsized rent gains. Affordability issues in nearby San Francisco and Oakland are also helping the Sacramento market as some residents are choosing cheaper rents, despite the significant commute to the Bay Area.

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While Sacramento’s rent growth has far outpaced the rest of the country for several months, development remains light, as only 1,481 units are currently under construction. In 2017, completions are expected to add a little more than 1,000 units, representing a meager 0.6 percent of total stock. With a relatively quiet development pipeline, expect rent growth in Sacramento to remain among the strongest in the country.

Other Californian markets leading the nation in rent growth include the Inland Empire (6.5 percent), Los Angeles (5.5 percent) and San Diego (5.0 percent), as their diverse economies, quality of life and steady real estate fundamentals provide a strong foundation for rent gains.

Los Angeles remains an attractive gateway city, with a diverse population of Southern California natives, domestic transplants and immigrants. It has long been the global capital of the film and entertainment industry, but a burgeoning tech scene along with the most active port on the West Coast and a significant professional and business services industry make L.A. one of the most diverse economies in the nation. Construction activity has responded to the strong rent growth, and 2017 completions are expected to represent 3.7 percent of the existing apartment stock.

Just to the east of L.A., the Inland Empire offers a more affordable alternative to pricey urban apartments. As more residents move eastward, however, rent growth in the Inland Empire has picked up and remained well above the national average. With close proximity to the Port of Long Beach, the Inland Empire serves as a major distribution hub for much of the West Coast and Southwest United States. Trade, transportation and utilities make up roughly one quarter of the employment force in the metro. Continued international and domestic trade, as well as overall migration from L.A. County, should continue to drive rent growth in the Inland Empire. However, potential trade policy changes bear mentioning, as isolationist tactics could negatively impact the trade, transportation and utilities industry in the Inland Empire.

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Seattle also found itself in the top five rent growth markets in March, as rents increased 5.4 percent. Strong job growth across the board, especially in the information, leisure and hospitality, and trade, transportation and utilities sectors, fueled growth in the Emerald City. Diverse job growth and steady in-migration has allowed the metro to absorb the significant new supply that has come online. While rent growth has decelerated from the once heady levels near 10 percent seen in 2016 due to the glut of new units hitting the market, Seattle seems poised to continue to outpace the nation.

A closer look at smaller markets experiencing outsized rent growth shows a similar trend to the larger markets. Rents grew in Reno by 10.3 percent on a year-over-year basis in March, as the northern Nevada market continues to make significant strides in developing its employment base. Manufacturing employment is up 6.4 percent year-over-year as several firms have chosen Reno as their preferred location for factories. Tesla’s gigafactory employed 850 manufacturing workers at the end of 2016, and plans to add 1,000 additional workers in the first half of 2017. Overall employment growth in Reno was 3.4 percent, more than double the national average growth rate.

Other strong rent growth markets can be found near major cities that have recently experienced significant rent and population booms. Tacoma (8.8 percent) and Colorado Springs (8.5 percent) offer more affordable rental rates with relatively close proximity to Seattle and Denver, and the urban sprawl continues to bring these cities together. As a result, the economies of Tacoma and Colorado Springs have expanded and diversified. While both remain strongly tied to local military bases, tech firms and start-ups have also grown in the markets.

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Supply growth in Tacoma and Colorado Springs remains limited compared to their larger neighboring cities, however both markets reside in relatively development friendly states, and continued demand for housing may spur increased construction. That being said, as affordability issues mount in Denver and Seattle, expect cost conscious renters to fuel faster rent growth in Tacoma and Seattle.

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Long seen as the American frontier, the Western United States has recently become the strongest region for domestic migration, and offers a number of attractive gateway markets for immigrants. Americans from many generations are moving westward for jobs, quality of life, and more favorable taxes, which has driven rents and development in many western markets. The trend of westward expansion should continue, and we expect rent growth to remain strongest in many of the Pacific and Southwestern markets.

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