More than half of apartment renters were satisfied enough with their living situation to renew their lease in April, even though rent prices continue to rise and more apartments come on line.
According to an MPF Research analysis of millions of units serviced by parent company RealPage, Inc., of all expiring leases in April, 52.2% were renewed. That rate, down from the 10-year high in February 2016, was 0.7 percentage points below the April 2015 rate. That year-over-year decline was only the third in the past 36 months.
“Declining renewal rates had been expected with so much new supply hitting the market, pulling some renters out of existing top-tier properties,” said Jay Parsons, vice president of MPF Research. “And the overall renewal retention rate in April was still quite high relative to the norms.”
More than 50% of renters with expiring leases have renewed in each of the past 28 months, which is a significant improvement from before 2010 when renewal rates typically hovered in the mid-to-upper 40s.
And while rents went up for people who renewed their leases, it wasn’t as steep as in past months, MPF says. Leases renewed in April 2016 included, on average, a 4.9% increase in monthly rent, which is down from the 5.5% peak last summer but still above the average for this cycle. Over the past 28 months, the average rent increase for a lease renewal was 4.7%, marginally higher than the mid-2000s norms.
Lease applications rose slightly year-over-year in April, while the average unit sat vacant 24 days between leases, unchanged from a year ago.
The lease-transaction results are “very encouraging for apartment investors and managers,” Parsons said. “But let’s put all the exuberance aside for a minute and remind ourselves that caution is still justified. April is an important month, but it’s still just one month. Monthly data can be volatile, so let’s see how the next few months play out.”
Construction Outpaces Demand
Across the nation’s 100 largest metros, data showed that demand climbed at a modest pace of 33,500 units in first quarter, which is short of the typical demand for 40,000 units to 50,000 units seen during the first quarter of the previous few years. All the while, quarterly demand in early 2016 fell well short of completions that totaled 59,500 units during the year’s initial three months.
Apartment construction is at its highest level in three decades. At the end of first quarter of 2016, nearly 492,000 units were under way in the top 100 U.S. metros and a total of 218,000 units were completed in the year-ending March 2015.
The market is now in its peak leasing season, which runs from April through August. Many apartment property managers strategically schedule the bulk of their leases to expire in spring and summer months, when demand is strongest. Rent performances during these months typically drive annual results.
“If the momentum seen in April extends into the summer months, 2016 will be another big year for the apartment industry,” Parsons said. “However, with so much supply at the top end of the market – particularly in urban submarkets – we expect to see some softening in certain spots. Conversely, top-tier suburbs should continue to perform very well.”