Demand for apartments across the country’s 100 largest metro areas reached 328,559 units in 2016, a 24% increase over 2015’s net move-in total, according to a new report from rental housing analytics firm RealPage. This demand figure represents the third-largest yearly move-in volume recorded over the past three decades, behind only those numbers recorded in 2000 and 2010.
Demand volume was surprisingly high in the fourth quarter of 2016, as renters’ usual hesitancy to move over the holiday season was offset by the large number of new properties in their initial lease-up periods. Demand for 50,455 units was recorded in the fourth quarter, more than six times the volume recorded in the same quarter in 2015.
“The apartment sector’s winning streak has run seven full years so far,” RealPage chief economist Greg Willett says in the report. “Job production continues at solid levels, encouraging new household formation. While apartment construction is substantial, significant building is justified by the very strong demand tallies.”
2016 demand for new apartment units surpassed the 289,704 apartment completions recorded last year, but Q4 demand didn't reach the number of units delivered in the last three months of the year, 87,939. RealPage notes, however, that the late-2016 delivery numbers are the highest recorded levels of quarterly new supply since the mid-1980s.
Nonetheless, at year’s end, apartment occupancy stood at 96.3% nationwide, up from 95.9% at the end of 2015. RealPage notes that “almost all” of these vacancies are in brand-new luxury units moving through initial lease-up, with far fewer units available in lower price tiers.
Rent Growth
While the 3.8% typical rent growth recorded in 2016 is still “well above” historical levels, the rate represents a slowdown from the 5%-plus rent growth observed at the end of 2005. (Rents fell by 0.5% in late 2016, which is a typical quarterly pattern.) The drop follows a streak of high growth rates that have increased the nation’s rents by 26.3% over the past seven years.
“Rent growth doesn’t have to reach best-ever readings to be strong,” Willett notes in the report. “Somewhat smaller price increases certainly were anticipated as the volume of new construction kicked into higher gear.”
The average monthly rent is now $1,248 nationwide. On a regional basis, Sacramento, Calif., saw the highest rate of rent growth across all of 2016, at 9.3%, followed by Riverside–San Bernardino, Calif., at 8.5%. RealPage notes that the recovery of the apartment market in these two metros had trailed that of the rest of the nation. On the other hand, Dallas–Forth Worth’s strong economic growth paired a 6% to 7% rent-growth rate with 7% of the nation’s new apartment deliveries in 2016 and 9% of the nation's current building activity.
Meanwhile, rents have fallen by 1.4% in New York, 1.3% in Houston, and 1.2% in San Jose, Calif., all metros designated by RealPage as key apartment markets. “While increasing deliveries are creating a more-competitive leasing environment for top-tier product in New York and the Bay Area, rent cuts, rather than just a slowdown in the growth pace, seem like an extreme move in many cases,” Willett said. “Bay Area owners and operators perhaps are beginning to realize that they’ve overreacted, as pricing looks like it’s nearing stabilization after more sizable cuts were common a few months ago.”
Coming Supply
The current construction pipeline in the 100 largest U.S. apartment markets totals 542,446 units, with 364,730 on track for delivery in 2017. This means that 2017’s new supply could top 2016's by 26%. While RealPage predicts that a spike in apartment supply could lead to more-competitive leasing in urban cores, the firm also notes that labor shortages and other factors have held back completions by about 10% to 15% in recent years. If this were to be the case, 2017’s deliveries would be on track with 2016’s demand total.
RealPage forecasts that occupancy will fall by 70 basis points and that annual rent growth will cool to 3.2%.
Top Rent-Growth MSAs, 2016
