The national average U.S. monthly rent remained flat at $1,354 from August to September 2017, according to Yardi Matrix’s Matrix Monthly survey of 121 apartment markets. The average rent grew by only $1 over the entire first quarter, following a strong first half of the year in which average rents grew by $33.
At the same time, year-over-year (YOY) rent growth fell to 2.2% in September, down 10 basis points (bps) from August and down a full 200 bps from one year ago. Rents grew by 2.6% through the first three quarters of this year, which belies the sector’s high performance over the past several years. Rents rose 3.4% through the same three quarters in 2016, 4.9% in 2015, 4.0% in 2014, and 3.1% in 2013. Yardi notes that rent growth tends to slow in the fourth quarter, so the year’s gains may already be decided.
Hurricanes, Labor Shortage Do Damage
On top of economic factors and supply and demand, the impact of the recent major hurricanes has affected rent growth in some markets. This is particularly true of Houston, which had already experienced negative YOY rent growth leading up to Hurricane Harvey. Over 50,000 multifamily units suffered damage in the hurricane, and many displaced households have turned to rental units for temporary housing.
The economy continues to add 150,000 to 200,000 jobs per month. Deliveries have slowed throughout the year, despite a cycle-high 480,000 units under way, as the labor shortage is making it hard for developers to find crews for their projects. Yardi predicts the labor situation may worsen as workers migrate to Houston and Florida to help rebuild.
The overall occupancy of stabilized properties fell to 95.5% in August 2017, down 10 bps from July and 20 bps YOY. (Yardi Matrix occupancy data are current to the previous month.) Yardi predicts that new-development delays and hurricane-related housing damage may drive occupancy upward. The vacancy spread between workforce "renter-by-necessity" (RBN) assets (95.6%) and luxury "lifestyle" assets (95.2%) narrowed to 40 bps in August, continuing a 10-month trend of tighter vacancy distribution between asset classes.
On a trailing three-month basis (T-3), rent growth fell flat in September. Yardi attributes this drop to strong rent growth in April, May, and June being followed by weaker performance in the latter half of the summer.
Both Orange County and the Inland Empire in California led the nation in T-3 rent growth, at 0.3%. Los Angeles and Atlanta also came on strong, at 0.2% each. Eight markets experienced T-3 rent reclines, including Nashville, Tenn.; Las Vegas; and San Jose, Calif., each at -0.2%.
On an asset-class basis, rents rose by 0.1% on a T-3 basis for RBN apartments, while lifestyle assets lay flat. Phoenix led the nation in RBN rent growth on this basis, with 0.3% T-3 rent growth, compared with flat growth in the lifestyle sector. (Yardi notes that the RBN sector’s YOY rent growth is 6.2%, compared with 2.0% in the lifestyle segment over the same period.)
On a trailing 12-month basis (T-12), rents rose by 2.8% in September, down 20 bps from August. RBN rent growth outpaced lifestyle growth, 4.0% to 1.6%, and the spread between the two asset classes widened to 240 bps.
At 9.3% growth, Sacramento, Calif., remains the fastest-growing T-12 rent market, as it has for many years. The Inland Empire comes in second, at 5.9%, followed by Seattle, at 5.6%; Los Angeles (4.7%); and Phoenix (4.3%). Houston's T-12 growth remains negative, at almost -2.0%, but Yardi expects the metro's rent growth will trend positive in the aftermath of Harvey.
While Sacramento, the Inland Empire, and Seattle remain the nation’s top-performing markets on a YOY basis, the rate of growth has slowed in each. Sacramento’s rent growth fell to 7.3% YOY in September 2017 from 10.2% in 2016, while the Inland Empire declined to 4.5% from 7.5% and Seattle to 5.8% from 7.3%.
Yardi does anticipate that apartment demand and capital forces should remain healthy over the next few years, given social trends and economic growth. While stock is expected to remain high, a more spread-out delivery schedule may temper vacancy growth and support modest rent increases over the next 18 to 24 months, the firm says.
