The average U.S. monthly rent dropped to $1,210 in December 2016, down by $4 from November, according to the Matrix Monthly survey by Yardi Matrix. This is the fourth month in a row in which Yardi’s measure of the national average monthly rent has dropped, although the decreases add up only to $10.
The 4.0% national rent-growth rate recorded last month is a 30-basis-point drop from November 2015 and 270 basis points lower than in October 2015, when the recent high of 6.7% was recorded. While seasonal factors were at play in December, rents are still decelerating in step with recent trends. Some metros have seen their rent growth flatten or even reverse year over year (YOY): Houston’s rent growth, for example, has fallen by 0.5%, while San Francisco’s has risen by only 0.4%. Others, despite losses, are still considered healthy, including Portland, Ore., (6.2% YOY) and Seattle (6.1% YOY).
Yardi emphasizes that apartment fundamentals remain strong despite the rent contraction, as the industry’s gains are still far above the historical average of 2.3% rent growth. A 3.9% growth increase is predicted for 2017.
Trailing 3-Month and 12-Month Growth
In order to calculate and present its trailing three-month (T-3) and 12-month (T-12) rent-growth data, Yardi Matrix divides its multifamily data into two categories: "lifestyle" and "renter by necessity." Lifestyle renters are generally wealthy enough to own but choose to rent higher-end properties, whereas renters by necessity (RBN) rent because they're unable to own, for one reason or another, and live in working-class or market-rate units.
On a T-3 basis, multifamily rents fell 0.3% nationwide last month. This represents a 10-basis-point drop in growth rates from November. Much of this decline took place in lifestyle properties, where rents dropped 0.4% on a T-3 basis; RBN rents fell by only 0.1% during the same period. (Yardi notes that seasonal trends weren't as much of a factor this season due to the industry’s current strength.)
Among particular metros, Phoenix led the T-3 growth, at 0.3%, followed by San Antonio and Los Angeles, at 0.2% each. Boston was the fastest-declining, at -1.0%, followed by Austin, Texas, and Portland, Ore., both at -0.8%. All three of the latter markets have had recent supply increases.
Denver is the fastest-growing lifestyle market on this basis, at 0.3%, and also the fastest-declining RBN market, at -0.8%. Given that much of Denver’s rent-growth activity last year was much the opposite, this trend could indicate a turnaround for the entire market, according to Yardi.
Rents in December fared better on a T-12 basis, growing by 5.3% nationwide. This figure is down 20 basis points from November 2016. RBN rents grew by 5.6% on this basis, while lifestyle rents grew by 4.7%. Sacramento, Calif., was the leading T-12 market, with 11.4% rent growth, followed by Portland, at 9.8%, and Seattle, at 9.5%. Sacramento was also the best-performing market in both the lifestyle and RBN categories, at 9.9% and 12.7%, respectively. Houston’s performance is still the lowest in this ranking, at just over 1%, owing to the area's heavy supply and low job growth.
The national multifamily occupancy rate remained at 95.7% in November 2016. (Matrix Monthly’s occupancy data cover the month previous to that recorded for rent-growth data.) Specifically, RBN occupancy remained at 95.8% and Lifestyle at 95.5%. Occupancy was stable last year, with only a 30-basis-point decline from March to December.
Looking Ahead to 2017
Yardi considers the coming year difficult to predict, given the changes that may occur in taxes and tariffs, as well as regulations and foreign policy. No impact on the rate of apartment absorption is expected, despite this worry. Yardi does predict that rent growth will continue to moderate as supply soars in the spring, but the trend may reverse as economic stimulus takes effect.
Rising interest rates are set to make a greater impact on multifamily property values than any change in economic policy. The 10-year Treasury rate increased by almost 70 basis points between the election and Christmas, which carries major implications for commercial real estate. Investors expect more rate hikes and greater economic growth in the future.
According to a study conducted by Yardi Matrix, a 50-basis-point interest-rate hike would reduce property values by nearly 6%. However, an increase in cash flow could soften this impact—a 50-basis-point rise in interest rates would be canceled out by a 5% rise in net income, for instance. Yardi predicts that rising interest rates could cut rapidly rising property values, however, continuing the current trend of moderation without cutting into the market’s strong fundamentals.
