Most people think that when a flood of new supply hits the apartment market, occupancy and effective rents will go down. That’s true in most cases, but not in the first half of 2014, according to Axiometrics research. Even though 180,000 units have come on line in the past year, with thousands more on the way in the third and fourth quarters, occupancy and effective-rent growth have been at their highest levels since almost the turn of the 21st century.

Occupancy in May was 95.0 percent, the highest since Axiometrics started reporting monthly in April 2008. Early-release second-quarter 2014 numbers also show occupancy at 95.0 percent, the best quarter since the second quarter of 2001.

Additionally, the 2Q14 statistics show the quarter-over-quarter effective-rent growth rate at 2.4 percent, the strongest performance since the third quarter of 2000.
So why is this cycle different from most others? Here are some answers:

1. Supply is still in catch-up mode.
The influx of all these new units hasn’t been felt yet because almost nothing was built in the early part of the Great Recession recovery, with financing so hard to get. Even deliveries in 2012 and 2013 grew inventory by only about 1.3 percent, below the long-term average of 1.5 percent. And the onslaught of 2014 deliveries, which is expected to total the most since before the recession, will be below or barely reach the long-term average.

Moreover, the number of new units doesn’t account for demolitions and conversions into condominiums, senior housing, and the like. Demolitions, especially, have been occurring at a growing rate as buildings from the 1970s, 1960s, and earlier become obsolete.

So, this game of catch-up has allowed occupancy to rebound more quickly than usual. Occupancy in some metropolitan statistical areas (MSAs) is the highest it’s been this century, which is leading to a sustained period of strong rent growth.

2. Single-family homes aren’t as popular as they once were.
Apartment construction in the past couple of years is about the same as it was in the last cycle (2003 to 2009), but there’s one big difference: Not as many people are moving from apartments to single-family homes.

The homeownership rate of 64.8 percent in the first quarter of 2014, as reported by the U.S. Census Bureau, was the lowest since the second quarter of 1995, when the rate was 64.7 percent. Single-family housing starts have flattened, with negative growth in four of the past 12 months, after a recovery from late 2011 to early 2013. The gap between single-family and multifamily starts has narrowed considerably in the past year.

These figures mean less overall residential supply available to residents, which means higher prices. Even though mortgage-qualification standards are loosening a bit from the noose of two years ago, the price of homeownership is still too high for many people. So, they stay in their apartments longer, even if the rent is somewhat higher.

Which leads us to …

3. Some people are scared of owning.
Many people, especially young adults, know someone who was hit very hard by the foreclosure crisis of the mid-2000s. They saw their parents, an aunt and uncle, a friend’s parents, or a neighbor go through the heartbreaking process of losing their homes. They saw the equity vanish in a minute.

As a result, what was once the American dream of homeownership has faded. Millennials, for the most part, are eschewing the suburban home and its negative connotations and are choosing apartment living instead, especially in the urban core, because they want to be closer to work and play and not have to rely as much on their cars. Occupancy and effective-rent growth have eroded slightly in some urban-core submarkets, but the new units in the center city are, for the most part, being absorbed.

Additionally, life-cycle events, such as marriage and parenthood, are occurring later in life, so Millennials can postpone the move into a single-family home. And many Gen Yers are still paying off student loans, meaning they lack either the credit rating or the 20 percent downpayment needed for a home, according to a July 1 article in Digital Journal.

This means we’re becoming a “renter nation,” as Nightly Business Report called it on its June 20 segment on apartment trends, which featured statistics from Axiometrics.

4. Many Millennials could leave the nest soon (finally!).
During the depths of the recession and into the early part of the recovery, many in the 25-to-34 age cohort were living with their parents because they either didn’t have work or were working at jobs that didn’t pay enough to leave Mom and Dad.

As job growth picked up, albeit not as much as the economy would have liked, some of these Gen Yers were able to move into a place of their own and let their parents breathe a sigh of relief—but nowhere near all those living at home could do so. Indeed, more than 5 million people in the 25-to-34 age group are still living with their folks, according to the U.S. Census Bureau.

If job growth were to start improving at a faster rate, more of those young adults could move out of their childhood bedrooms, and the apartment market would be that much stronger.

5. New apartment properties target a new market.
Most of the new supply is priced for the top end of the rental market. What is being delivered are generally Class A, urban-core or prime suburban properties that are likely beyond the reach of renters in existing, older units.

In other words, it’s very much a new breed of renter that will occupy these new units, though, certainly, some renters are upgrading to the newer, more expensive units. Still, that upward mobility, in turn, opens up units for those unable to afford the new, urban-core apartments.

The pent-up demand and decision to rent, not own, have caused a surge in both Class A and B effective-rent growth. Higher-income people are absorbing the newer, top-of-the-line units while others who couldn’t rent before or have found better jobs are lapping up Class B apartments—especially Class B+, which have many of the amenities and attractions as Class A units; they’re just a bit older and lower priced.

Much like the Great Recession and the subsequent recovery differed from the economic norm, the current apartment-market cycle is differing from previous cycles.
Stay tuned to see whether occupancy and effective-rent growth continue increasing through the rest of the year.

Jay Denton is vice president, research, and K.C. Sanjay, senior real estate economist, at Dallas-based research firm Axiometrics. They can be reached at and