With immense growth in this recovery cycle, multifamily executives are ­eager for yet another great year. That’s understandable after a banner 2015: ­According to MPF Research, rent growth and occupancy levels reached historic highs last year, at 5.6% and 96.1%, respectively.

But if this rent growth cycle were a game of musical chairs, some apartment executives would be concerned about how long the music had been playing.

Take Julie Brawn-Whitesides, executive vice president of property management at The ConAm Group. The apartment owner and manager operates in the white-hot California market. Yet, Brawn-Whitesides knows this run won’t last forever.

“This cycle is atypical. We’ve always kind of traveled along the bell curve, and we’ve been at a steady incline longer than those bell curves typically last,” she notes. “But as long as there are strong fundamentals that are met with strong job growth, and we continue to see a lower [rate] of homeownership, this could actually be one of the longest cycles yet.” 

As Brawn-Whitesides indicates, strong job growth could extend this cycle even further. But there are other trends, such as the rent-to-income ratio, causing many owners and managers to moderate their expectations for the coming year. 

Supply-and-Demand Factors

The main factor that could inhibit rent growth this year might simply be consumer tolerance. Rent growth has outpaced wage growth by nearly double in the past five years, causing many renters to reach a 30% rent-to-income ratio, which is generally considered indicative of financial stress. 

“Obviously, we’re taking a larger percentage of people’s earnings for rent. You can reach a point where you have a situation where you can push but you can’t push very much further,” says Rick Graf, CEO of Pinnacle. 

The ConAm Group’s executive vice president of property management Julie Brawn-Whitesides is heading into 2016 with a cautiously aggressive attitude toward rent growth.

But if the economy keeps adding jobs, there could potentially be an upward push on wages. According to Ric Campo, CEO of Camden Property Trust, 2016’s fate will depend on whether the U.S. economy continues to churn out those jobs. He relates today’s situation to the recovery between 1993 and 2001—at eight years, Campo says it’s the longest recovery he’s seen. During that time, the U.S. economy created roughly 22 million jobs. Yet, nearly six years into the current recovery, the economy has created only 13.5 million jobs.  

“There’s a fair group of thought that because we’ve only added 13.5 million jobs in six years, this could be a prolonged recovery,” Campo says. 

In the minds of most apartment executives projecting rents, however, those demand factors take a back seat to larger supply concerns. With 243,653 new units delivered in 2015 and 304,318 more expected in 2016, renters will have a lot more options, meaning rents could ultimately fall. 

“The key factor in lower rent growth is less momentum at the top of the market, because we have to digest this new product,” says Greg Willett, chief economist at MPF Research. 

But Ryan Severino, senior economist and director of research at Reis, believes the onslaught of deliveries will boost rent growth initially.

“We’re starting from such a tight market environment. You’ll still see landlords with the ability to push rent increases onto their tenants,” he says. “But, obviously, as you go forward in time and vacancies drift higher, they lose some of that leverage.”

However, Willett adds, construction delays are reducing deliveries at any given time by nearly 20%, and if that pattern continues, ­deliveries in 2016 will likely be closer to 2015’s level.

Even if deliveries do decline, Brawn-Whitesides worries about the concentration of high-end deliveries in some markets. “Class A—depending on location—could see concessions when new product comes on,” she says.

Projections for 2016 and Beyond

Despite calling the challenged Houston market home, Campo is altogether positive about the outlook for 2016, claiming the apartment market should perform pretty similarly to how it did in 2015. But even the optimistic Campo knows how hard it is to continue stacking years of above-average rent growth on top of each other.

“We’ve obviously had a great five years in this business, and 2016 so far looks like it could be another above–long-term-trends year,” he says. “There appears to be enough demand to keep rents growing. Now, are they going to grow at the same rate that they have in some markets? I doubt that.” 

Brawn-Whitesides says she’s being carefully optimistic going forward. While signs are pointing to a good year, she doesn’t want to be too aggressive. For now, ConAm is focusing on Class B assets where new supply isn’t dominating the market. “There’s also kind of a greater focus placed [on Class B assets] because the renters are typically there by necessity, versus a renter by choice. That allows us to better insulate from significant swings,” she says.

Top 10 Markets for Rent Growth in 2016

1  Portland, Ore.   8.4%
2  Oakland, Calif.   8.3%
3  San Jose, Calif.    8.1%
4  San Francisco   6.7%
5  Las Vegas   6.2%
6  Denver–Boulder  5.6%
7  Fort Worth, Texas  5.3%
8  San Diego  5.0%
9  Seattle  4.9%
10 Orange County, Calif.  4.8%

Source: MPF Research

Graf seems to agree, saying he also puts himself in the “cautiously optimistic” category for 2016. “Across the board, we’re budgeting rental increases [this] year, albeit smaller than we have the last few years,” he says, adding that he’s concerned about the increased supply and the relative affordability in some markets.

MPF projects 4.3% rent growth for 2016. While that’s a 130-­basis-point drop from last year, it’s still well above the historical average of 2.5% to 3%—but the slowdown in general could indicate that above-average growth won’t last much longer.

“We’ve got maybe two or three more years of rent growth above historical averages,” Willett says. 

Severino agrees it’ll be a few years before rent growth falls below 3%, but he warns that property managers should keep an eye on their occupancies. “Occupancies are not increasing anymore, and it kind of stabilizes the trends downward. That’s probably the first thing you’d see before outright pressure on rents,” Severino says.

After living through a number of cycles, Campo knows vacancies will rise and the music will ultimately stop. 

“We’re not at the peak, but we’re definitely bouncing around the peak maybe,” Campo says. “That’s why we’re more conservative. The risk is higher today that there could be a recession on the horizon. And no one knows when they come. They just come.”

In the past year alone, Camden has sold off roughly $400 million worth of assets, and in the past few years, Campo has focused on diversifying his company’s portfolio and lowering its debt. He also plans to shrink Camden’s $1.1 billion development pipeline. 

“You hope for the best and plan for the worst,” Campo says.