For the most part, this century’s multifamily revenue activity has moved in cycles as employment levels and new supply have fluctuated from year to year.
National multifamily revenue growth averaged 2.3% from 2000 to 2016, according to Axiometrics, with a recent low of -6.4% growth in 2009 and a recent high of 5.9% in 2006.
In the post-recovery period, the steady climb of employment growth has been the main driver of strong multifamily market fundamentals, which led to the strong levels of annual revenue growth recorded from 2010 to 2015. At that point, however, oversupply placed more pressure on rents, dropping growth down to 3.2% in 2016, reports Zelman & Associates in The Z Report.
As 2017 goes on, predicts the report, apartment market fundamentals will be challenged by both high supply and low demand. National employment growth is expected to soften, to 1.4%, in 2017, also the lowest level recorded since 2010. With national unemployment at just 4.3%, incremental employment expansion becomes more difficult, notes Zelman & Associates. At the same time, national multifamily completions should increase by 16% this year, a level of supply growth not seen since 1989.
In the first quarter of 2017, multifamily revenue growth hit a new recent low, at 2.1%, the lowest level since Q1 2010. This initial result puts this year on track to be below the 2.3% national average for the first time since 2009. In fact, Zelman predicts national industry revenue growth of just 1.6% this year, followed by 1.1% in 2018. (Zelman notes that this estimate is cautious, given the slow start to the year.)
On the local level, Zelman anticipates 5.4% revenue growth in the Inland Empire, Calif., followed by 5.1% in Seattle and 4.1% in Las Vegas. On the other hand, a 4.5% decline in revenue growth is expected to take hold in Houston, alongside a 1.4% drop in San Francisco and a 1.1% drop in Austin, Texas.
In Nashville, Tenn.; Orlando, Fla.; San Jose, Calif.; and Austin, strong employment and supply gains in recent years have given way to revenue-growth deceleration as new supply has outstripped demand. These four markets generated average revenue growth of 6.1% in Q1 2016 but fell to 1.1% by Q1 2017.
Based on these results, Zelman says supply is the multifamily market’s main driving force today. According to the Census Bureau, approximately 620,000 multifamily units are under construction as of April. This number represents a 9% increase year over year and a 23% jump from two years ago, up to the highest level of new construction since October 1974. Zelman doesn't think the influence of this new supply will drop any time soon, contrary to the view of many industry observers who contend this pressure on pricing power will ease after this year.
