Increased construction of apartment properties across U.S. markets in the last few years was a welcome sign that the economy was truly on a recovery path. But this building boom has resulted in heady oversupplies and vacancies that have climbed to their highest level since 2012 despite continuing strong demand, according to Ten-X Commercial’s newly released U.S. Apartment Outlook.
“Completions have outstripped absorption for six straight quarters, while absorption has slipped to its lowest level in more than five years,” Ten-X Chief Economist Peter Muoio said in a news release announcing the new report. “While today’s sub-5 percent vacancy rate is relatively low from a historical perspective, vacancies have climbed to their highest level since 2012 amid this new supply.”
More than 300,000 new units are expected to flood the U.S. market this year, with completions hitting an all-time peak and outpacing even the highest absorption levels in recent history, says Ten-X Commercial, the nation’s leading online and only end-to-end transaction platform for commercial real estate.
The report projects vacancy rates topping 5 percent by the end of this year, the first time that has happened since 2011. Vacancies have climbed 40 basis points in the past year and are projected to soar by another 110 bps by 2021.
While millennials and other demographic groups continue to forego homeownership in favor of renting in walkable neighborhoods, developers appear to have gotten ahead of themselves in creating rental supply,” said Ten-X Chief Economist Peter Muoio. “The pipeline can reasonably be described as a flood and though demand for these units is likely to come in the years ahead, we can expect to see some significant digestion issues in the near term.
In its outlook, Ten-X Commercial also identified the top 5 “buy” and “sell” markets for multifamily. The top markets where investors should consider buying include Houston; Raleigh-Durham, N.C.; Salt Lake City; Fort Worth, Texas; and Charlotte, N.C. The report notes that these markets have strong economies and robust demand for apartments at present.
On the other side, the markets where investors might consider selling their multifamily assets include Miami; San Jose, Calif.; New York City; San Francisco and Oakland, Calif. Those cities are continuing to see new supply coming online, resulting in rising vacancies and flattening rents.
Following is Ten-X Commercial’s assessment of each of these 10 markets.
The Apartment Sector’s Top Five ‘Buy’ Markets
In Houston, a resurgent energy sector is turbocharging the local economy and buoying apartment rents. Houston’s multifamily vacancy rate measured 6.2 percent in the first quarter of 2018, down 50 bps year-over-year and 660 bps below the cycle peak. Effective rents jumped 6.1 percent year-over-year, accelerating to their peak rate for the cycle. Ten-X Commercial forecasts that Houston is likely to prove considerably more resilient during a modeled downturn than other markets, with NOIs likely to see 6.0 percent annual gains through 2021.
Economic indicators show Raleigh-Durham sustaining healthy gains, despite cooling in some sectors. The market’s unemployment rate fell 50 bps year-over-year and is below the national average, while annual job growth is in the 2 percent range and payrolls are at an all-time peak. Effective rents rose 5.3 percent year-over-year, close to the peak growth rate for the cycle. In the event of Ten-X Commercial’s modeled downturn in 2019-2020, Raleigh should maintain its upward trajectory with apartment rents finishing 13.4 percent higher than their current mark in 2021. NOIs are projected to rise each year at an annual average of 3.6 percent.
Salt Lake City
Salt Lake City’s robust transportation/utilities sector is helping drive rapid job growth and apartment availability remains tight in Utah’scapital. The city’s economy will likely weather a recessionary scenario better than most markets and apartment rents are projected to rise by a total of 12.6 percent by 2021. In the same time period, NOIs will climb 3.4 percent annually. The market’s positive picture is buttressed by an unemployment rate well below the national average and a fast-growing population.
Fort Worth is enjoying low unemployment and solid job growth, with total employment up 3.1 percent year-over-year. The city’s prominent trade and transportation sector jumped 4.1 percent from a year ago, while leisure and hospitality employment posts robust gains of more than 5 percent per year. Though apartment vacancies are unchanged year-over-year at 3.7 percent, they measure at 800 bps below their cycle peak. Like other top “Buy” markets, Fort Worth is expected to weather a modelled recession with resilience. Apartment rents in the city are projected to be 12.3 percent higher by 2021, while NOI will rise 3.2 percent per year through 2021.
The outlook for multifamily investors in Charlotte is bright, in part due to the market’s healthy employment gains. Annual job growth is in the high 2 percent range and payrolls are at an all-time peak. The professional and business services sector, the metro’s largest, has seen robust growth this cycle. The education and healthcare sector has also seen job gains. Meanwhile, population growth remained at an impressive 2.0 percent in 2017, almost triple the national average. Effective rent growth is up 6.4 percent year-over-year, making it the most aggressive rate of the cycle. Rents are projected to rise 10.2 percent from their current position by 2021, despite the modelled recession. NOI will likely record annual gains of 2.8 percent through 2021.
The Apartment Sector’s Top Five ‘Sell’ Markets
Miami’s economy is cooling and a heavy construction pipeline will offer little relief. In the event of a modeled downturn in 2019 and 2020, Miami would prove considerably less resilient than most markets. Apartment rents are expected to rise a tepid 0.5 percent from their current marks by 2021, while vacancies are expected to spike to 10.0 percent that year. NOI is projected to drop sharply in 2019-2020, eclipsing the expected gains in 2018 and 2021.
San Jose’s economy is showing signs of a slowdown, even as a heavy supply pipeline continues to hit the market. Unemployment is an extremely low 2.6 percent, but population growth slid for a fourth straight year in 2017 to 0.4 percent, suggesting the end of the city’s rising tide. Though effective rents rose 2.1 percent year-over-year, that rate is a substantial slowdown from the pace earlier in the cycle. In fact, rents are forecast to fall 2.7 percent between now and 2021 with vacancies settling at 6.7 percent, 210 bps higher than current levels. Due to severe declines during the modeled recession, NOIs are projected to fall 1.0 percent on average through 2021.
New York City
An unrelenting supply pipeline is sending vacancies soaring, as key sectors of the city’s economy weaken. New York City is not forecasted to weather the modeled recession well, as several key business sectors are already seeing slowed growth. Over the next three years, apartment rents are projected to fall 1.2 percent from their current mark, while vacancies will grow by 40 bps to 5.9 percent. New York City’seconomic growth rate remains stuck in the 1 percent range, a sharp slowdown from earlier in the cycle. Population growth has slowed for the sixth consecutive year in 2017 to just 0.1 percent.
Note: Ten-X Commercial’s analysis of the New York City market focuses solely on market-rate rental complexes consisting of 40+ units in Manhattan, Brooklyn, Queens and the Bronx. It excludes affordable housing, condos and co-ops.
Like San Jose, San Francisco’s outlook is hampered by poor demographics combined with a heavy supply pipeline. While the economy is still adding jobs, the rate of expansion has cooled from its previous torrid pace. The city is expected to be considerably less resilient than average in the event of a modeled downturn, with apartment rents dropping 4.0 percent from their current levels by 2021. Over the same time period, vacancies are expected to rise 150 bps to 6.0 percent. NOI will fall 1.1 percent annually through 2021, with 2018 and 2021 gains bookending severe declines in 2019 and 2020.
Oakland’s economy faces considerable tech-related downside risk. The large information sector is growing at just 1.5 percent, sharply below its 2015-2016 pace. While unemployment is extremely low, the city’s appeal to newcomers seems to have abated, as population growth decelerated to 0.7 percent in 2017. Meanwhile, a heavy construction pipeline is colliding with weak demand, straining fundamentals. Apartment rents will decline by 2.8 percent by 2021, while vacancies are expected to rise to 5.4 percent. Like other “Sell” markets, Oakland’s severe NOI losses projected for 2019 and 2021 will offset gains in 2018 and 2021; on average, NOIs will fall 1.0 percent annually through the forecast period.
You can view the Ten-X Commercial news release by clicking here.