Apartment Rent Growth Loses Momentum, Leasing Remains Healthy

Average apartment rents across the United States grew 1.2 percent in the second quarter and 4 percent from mid-2011 to mid-2012, according to a report from MPF research. These numbers represent a loss of momentum from the fourth quarter of 2011which saw a rent growth rate of 4.8 percent. The soft patch in job production seems to be part of the problem, though overall the apartment market remains healthy.

Average apartment rents across the United States grew 1.2 percent in the second quarter and 4 percent from mid-2011 to mid-2012, down a bit from the end of last year, when the fourth-quarter growth rate was 4.8 percent, according to MPF Research.

Greg Willett, vice president of MPF Research, the Carrollton, Texas-based market intelligence division of RealPage Inc., cited concerns over the sluggish job market and decisions by some apartment owners and operators to keep rents steady as a way to compete with new properties expected to be ready for leasing soon.

“While rent growth remains well above the long-term norm, there’s no question that pricing momentum now isn’t quite where it was a few months ago,” Willett said. “For many owners and operators, the soft patch seen in job production has raised concerns that apartment demand could prove sluggish during the last half of the year. At the same time, initial leasing will begin during the next few months on quite a few new properties that are on the way. The typical operational strategy calls for filling product now, even if it means holding back a bit on the rent increases that were targeted earlier.”

Boosted by tech sector jobs, San Francisco and San Jose, Calif., are still seeing double-digit rent increases, in many cases more than twice the average rent increases seen in other U.S. cities.  From second-quarter 2011 to mid-year 2012, the average rent rose 12.6 percent in San Francisco and 10.3 percent in San Jose, according to MPF Research. Charlotte, N.C., was the third highest rent growth leader with a year to year growth rate of 6.8 percent. From mid-2011 to mid-2012, rents rose 6 to 6.3 percent in Oakland, Calif.; Boston; Austin, Texas, and New York. Rounding out the top 10 list was Denver-Boulder with 5.7 percent growth, Raleigh-Durham with 5.4 percent growth and Hartford, Conn., with 5 percent.

Marcus & Millichap’s 2012 National Apartment Index also places San Francisco and San Jose atop its list but has San Jose taking the top spot above San Francisco, although rent growth is only one factor in its index which looks at several forward-looking economic and supply and demand variables. Those cities, followed by New York, Boston, and Orange County, Calif., rounded out Marcus & Millichap’s NAI Index because they are expected to “post continued employment growth and effective rent growth in 2012.”

The MPF Research second-quarter report also found that the national average occupancy was 95.2 percent, up from 94.9 percent in the first quarter and 94.4 percent in mid-2011. Those numbers are all up significantly from a 92 percent occupancy rate in late 2009.

Across the country’s 100 largest metro areas, second-quarter demand was at 51,400 units, surpassing the completions that were held to 19,000 units, according to MPF Research.  Year to year demand was for 169,500 units, more than double the 68,100 units that were delivered.

“While demand has cooled somewhat from the especially strong levels seen in 2010 and 2011, the current pace of leasing activity is still healthy,” Willett said.

That’s good news for the middle-market properties because they are also seeing the new activity that would have gone to the top-tier units if they had space available, he added. Many communities “are starved for additional inventory,” Willett noted, but developers are scrambling to get more apartments quickly ready after record low housing starts during the recession.

Overbuilding isn’t expected to become too big of a problem because of the general lack of supply. Willett said if it occurs, it would likely be on a spot basis. He said metro Washington, D.C., could be an area to watch for potential multi-family overbuilding because job growth isn’t as strong there as in other places, such as Texas.

“While some of the some of the biggest increases in construction are seen in the Texas markets, those areas also are the country’s job growth leaders,” Willett said. “The stocks on the way in the Lone Star state do look absorbable.”