Asking rents grew by 1.0% across the country in the third quarter of 2017, up to a national average of $1,356, while effective rents grew by 0.9% over the same period, up to a $1,295 national average, according to Reis’s Q3 2017 Apartment Preliminary Trends Announcement. The healthy rent-growth rates reflect confidence in the current market, as well as in the continued balance between demand growth and expected supply growth, notes the research firm.
The gap between asking- and effective-rent growth, which had widened to 20 basis points (bps) in recent quarters, narrowed again this quarter, to 10 bps. This suggests a decrease in the use of landlord incentives, such as free rent periods, to attract tenants.
Only six metros, including Fairfield County, Conn.; Syracuse, N.Y.; and Knoxville, Tenn., experienced a decline in effective rent. Effective-rent growth was strongest in Salt Lake City; Austin, Texas; Charlotte; Lexington, Ky.; and Washington, D.C., where quarterly growth rates and YOY job-growth rates exceeded 2.0%.
In New York City, effective rent increased by 0.8% over the previous quarter, while the vacancy rate rose to 4.7% from 3.8%. New York’s average rent has now risen two quarters in a row, after declining in four of the previous five quarters. On an annual basis, the city’s asking rent is now 1.8% higher than it was a year ago, though its effective rent is only 0.7% higher. Over 100,000 new jobs opened in the city over the past year, which will keep occupancy growth positive in the near term, says Reis.
Job Growth a Factor in Low Vacancy Rate
The national vacancy rate, also, increased by 10 bps in the third quarter, to 4.5%, and was up 40 bps year over year (YOY) from 4.1% in the third quarter of 2016. While total inventory is still expected to increase in the coming years, new construction came in lower than expected this quarter, at 47,271 new units nationwide. (This number may be revised once Reis estimates the recent hurricanes’ impact on the Florida and Houston markets.) At the same time, occupancy growth, or net absorption, was 31,352 units in the most-recent quarter.
Given the glut of new-apartment construction across the country, the national vacancy rate skews lower than expected, according to Reis. This may stem from the high rates of employment growth in many major metros, which has increased demand for apartments in those areas.
On the metro level, 50 of 79 major MSAs Reis tracks saw increased vacancy rates in the third quarter of 2017, up from 27 metros in the second quarter, owing to supply that exceeded demand. Of these 50, however, all but 14 posted positive net absorption. Denver, Seattle, and Charlotte, N.C., experienced both significant net absorption and growing vacancy rates, owing to the rate of new construction in these three metros. (Job growth in these areas exceeds 2.1% YOY, higher than the 1.5% national job-growth rate and the 1.9% average metro job-growth rate.)
On a YOY basis, 52 of the 79 metros showed vacancy increases, and 51 recorded employment-growth rates exceeding the national average of 1.5%.
While Reis expects new-construction numbers and vacancy rates to continue rising in the near future, it doesn't foresee rent declines in many areas over the next few quarters. Current rent-growth trends point to the overall health of the apartment market, though the impact of the 2017 hurricane season is not yet clear.
