Both GDP growth and employment growth have remained steady over the past eight years, Reis senior economist Barbara Byrne Denham reported in the firm's Q1 Capital Markets Briefing, held May 31.
GDP growth was 2.2% in the first quarter of 2018, despite the expectations of some analysts that the recent tax reform bill would boost GDP right away. Denham attributes the quarter’s “sluggish” GDP growth to low consumption growth, at 1.0%, and a 2.0% drop in residential fixed investments, and notes that many believe the impact of the new tax code will be felt in later quarters.
Year-over-year (YOY) job growth held steady in Q1, with 2.2 million jobs at a growth rate of 1.5%, down slightly from 1.6% growth in 2017, 1.8% growth in 2016, and 2.1% growth in 2015. May marks the 95th-straight month of job growth, or the second-largest expansion in 50 years.
Overall, GDP has grown a cumulative 21.1% since 2009.
“We reiterate that [the first quarter’s] lower growth rate is healthy, because the higher growth rates of the past led to the herd mentality on overinvesting, overdevelopment, and speculation that was unsustainable and eventually led to the recession,” Denham says. “…This cycle still has room to grow precisely because it has grown at such a slow rate.”
As of the quarter, overall employment growth has risen to match the growth of the working-age population, which could lead to an increase in annual wage growth. Denham notes that these trends have moved very slowly over the past several years already, a trend that is likely to continue. Given the labor shortages in some cities and industries and the recent increase in the Federal Funds Rate, the employment growth rate may soon decelerate.
On a 12-month rolling average, apartment cap rates have fallen from just under 6.5% in the first quarter of 2013 to about 5.8% in the first quarter of 2018—a record low. Even though the Fed raised the overnight borrowing rate in March, cap rates fell by 10 basis points over the course of the first quarter. (Office, retail, and industrial cap rates trend higher, with Q1 2018 rates ranging from 7.8% for retail to just under 7% for office.)
However, investor interest in multifamily properties remains high, as they generate higher returns at a lower risk than other asset types, according to Denham.
Rent-Growth Outlook Remains Positive
The average effective apartment rent grew by 0.8% in Q1 2018, up from 0.5% in the previous quarter. Meanwhile, the vacancy rate rose slightly, to 4.7%, but overall the occupancy rate is considered healthy.
“The outlook for the multifamily market is for continued positive rent growth with decelerating but positive occupancy growth,” says Denham.
Interest rates have been, according to Denham, “very volatile as of late.” The steady increase in the two-year Treasury rate has tracked the increase in the Federal Funds Rate, while longer-term rates have slowed or even declined. While the 10-year Treasury rate fell below 3% during the week of May 29th, Denham attributes this drop (and a matching drop in the two-year Treasury rate) to political upheaval in Italy.
“It seems that each new day brings a new surprise in the global economy, whether North Korea, the Middle East, or the trade wars,” Denham says.
Based on an analysis of all apartment transactions of $10 million and above in the top 50 metro markets, the average price per unit in the apartment market fell 2% from Q4 2017 to Q1 2018 but rose by 10% YOY. Since 2013, the average price per unit in the apartment market has risen 23%, from $143,000 to $176,000.
West Paces the Country Regionally
Denham notes that while regional averages vary widely from quarter to quarter, the national average has remained relatively flat. The Northeast is the most volatile and most-expensive region, as its prices are heavily weighted by New York City. Without New York City, the Northeast has recorded lower sales prices per unit over the years but has still experienced similar volatility.
The average sales price per unit has risen by 37% in the West since 2013. This is the steepest increase, followed by the South Atlantic, where the average price has increased 27% over the same period. Sales prices in the Southwest and Midwest, conversely, fell below 2013 numbers in Q1 2018.
Regional sales volume in the West and South Atlantic has trended upward over the past five years, while Northeastern sales volume has fallen since late 2016. As such, Reis notes, West and South Atlantic apartment asset trades have weighed more heavily on national averages in the past five to eight quarters than have Northeastern apartment asset trades.
The overall U.S. metro sales volume fell in the first quarter, as is common this time of year, but it was 14% higher than in the first quarter of 2017.
Based on this quarter’s data, Denham concludes that GDP growth is forecast to be 2.7% for the year, barring any geopolitical upheaval, and employment is expected to rise 1.6%.
Investment-sales market volume is expected to drop as investors scrutinize deals more than they have in the past, but average sales prices for most property types should trend higher, in line with increases in rents.
