Axiometrics Inc.

Coming off a stronger-than-expected 2014, the apartment market continued its upward trend to start 2015, according to preliminary first-quarter data from Axiometrics. The primary reasons: jobs, jobs, jobs–though the latest employment report from the Bureau of Labor Statistics (BLS) may be a sign that the job-creation machine may be slowing a bit.

Annual effective-rent growth in the first quarter was 4.9%, the highest rate since the third quarter of 2011 and the highest first-quarter level since 2006. That’s a very sunny metric for investors and landlords. What was even sunnier in the dead of winter was the job-gain numbers from the BLS. At least for the first two months of the year.

Employers added a total of 660,000 jobs during the first three months of 2015, but only 126,000 of them came in March, the BLS reported. The unemployment rate was unchanged at 5.5%

More jobs, of course, mean higher apartment demand. Axiometrics’ supply/demand model forecasts that some 394,891 apartments were to be absorbed from the first quarter of 2014 to the first quarter of 2015, while just 350,031 new units were to be delivered in the same time frame.

With that kind of demand, no wonder landlords believe they can push rents higher, even though more than 350,000 new units were added to the market in the past four quarters and 2015 is forecast to have the most apartment deliveries of any post-recession year.

So, Axiometrics forecasts that a total of 2.9 million jobs will be added for the full year. That means effective-rent growth will remain near or above 5% in the foreseeable future, right?

Well, probably not.

Will Oil Prices Hurt U.S. Labor?
BLS’s March employment report, issued April 3, showed a drastic downturn in job gains: The 126,000 jobs added last month, combined with downward revisions of the January and February job-gain numbers, could indicate a slowdown in the number of jobs becoming available. But this slowdown was anticipated; the days of 200,000+ jobs added per month likely were unsustainable.

Axiometrics forecasts job growth to be about 2.1% once 2015 is in the books. It’s also likely the employment market has yet to see the full effect of the past nine months’ changes in oil prices.

The mining and logging employment sector, which includes the oil industry, has lost 30,000 jobs so far in 2015. With the price of West Texas Intermediate crude hovering around $50 per barrel during the first quarter of 2015, with no sign of significant increases on the way, the industry might cut back even further. Meanwhile, the time will likely come this year when the amount of new supply finally catches up and exceeds demand.

Returning to Axiometrics’ supply/demand model, 278,306 apartments are forecast to be absorbed this year, but 372,266 new units are expected to open. If that model holds true, 2015 could see the pendulum swing back to a renter’s market. Occupancy would likely fall, and landlords would be unable to push asking rents much higher–or, if they did, they’d have to offer more concessions. Occupancy was 94.6% in the first quarter of 2015, according to Axio’s metrics.

With that said, Axiometrics forecasts effective-rent growth to be 3.0% for the year. Five percent rent growth is not sustainable in the long term, and the 2013-2015 period has seen an absolute boom in new supply. Nonetheless, while the forecast doesn’t reach 2014’s lofty levels, it’s still quite strong.

And slowing job gains could be a boon to the apartment market: If people see that fewer jobs are available, it might make them think twice about buying a home, which means they would stay in apartments longer.

Now, back to the positive first-quarter news.

Once again, the Western and Southern metro areas achieved the highest annual effective-rent growth. Northern California–Oakland, San Francisco, San Jose, and Sacramento, in that order–take four of the top five spots on the rent-growth chart of the top 50 markets based on total supply. Only Denver, at No. 3, breaks into the bunch, and only Oakland (14.9% annual effective-rent growth in the first quarter), San Francisco (12.6%), Denver (11.9%,) and San Jose (11.3%) experienced rent growth above 10%.

West Looks Best 
Overall, the top 22 markets are west of the Rocky Mountains and/or south of (or on) Interstate 40. No. 23 New York (4.8% annual effective-rent growth) and No. 31 Boston (3.4%) were the strongest Northeast markets, while No. 26 Chicago (4.4%) and the suburban Detroit metro of Warren-Farmington Hills-Troy, at No. 30 (3.5%), were the top Midwest metros.

In sum, early 2015 is a good time to be an apartment market investor or landlord. As long as jobs continue to be added, the sector will remain strong–even with some moderation of “The Year of the Apartment Market” in 2014.