The national average apartment rent fell by $3 in October to $1,216 from $1,219, three times the amount it fell last month, according to the Matrix Monthly report by Yardi Matrix. This is the second average apartment rent decrease since November 2015 and the steepest month-over-month drop since October 2013. However, rents grew by 4.4% on a year-over-year basis in October, down 30 basis points (bps) from September’s year-over-year growth but up 230 bps from October 2015.
Yardi attributes the deceleration in the national average rent not to a market slowdown but to a moderation of 2015's and early 2016’s high growth in many metros. Sacramento, Calif.’s 12.1% year-over-year (YOY) rent-growth rate is the only such rate above 7.4% last month across Yardi’s 123 surveyed markets.
A high supply of luxury units across many metros has limited rent growth in some metros, in tandem with a slowing rate of job growth. Rent growth among lower-cost units remains greater than that among luxury units.
The report notes that fundamentals in most markets are still strong, occupancy is not far from cyclical highs, and household formation is above trend. Furthermore, 26 of Yardi’s top 30 metros are above the long-term average for rent growth. Metros where rent growth is dropping (San Francisco, Houston, and Denver) have unique supply, affordability, and job-growth issues that affect their rental market conditions, Yardi observes.
Growth by Asset Class
For the purposes of tracking rent growth on a trailing three-month (T-3) and trailing 12-month (T-12) basis, Yardi divides its rental property data into two classes: “lifestyle” and “renter by necessity.” Lifestyle households choose to rent despite having enough wealth to own a residential property and usually rent in luxury or Class A assets. Renter-by-necessity households, conversely, rent because they lack sufficient wealth to own, or because the demands of their job require them to move frequently. For them, renting is either the best or the only option. They usually rent in market-rate or low-income properties.
On the short-term T-3 basis, multifamily rent neither rose nor fell nationwide in October, which marks a 20 bps decrease from September’s 0.2% rent rise on a T-3 basis. Lifestyle-segment rent fell by 0.2%, while renter-by-necessity rents grew 0.1%. (Yardi notes that the month’s T-3 range is affected by seasonality, as the measurement compares the weaker fall period with the stronger spring period.)
Orange County, Calif., saw the strongest rate of T-3 growth, at 0.9%, followed by San Diego, at 0.5%. San Francisco saw the steepest drop, at 1.0%, with a staggering lifestyle rent contraction of 1.8%. Seattle (-0.8%) , Denver (-0.5%), and Boston (-0.5%) were also among the farthest-falling markets in this period.
Yardi notes that these markets were growth leaders earlier this year, and that their current falls are due to oversupply on the high end, a slowdown in job growth, and unsustainable rates of rent growth.
On a long-term, T-12 basis, rents grew by 5.7%, down 20 bps from September. The renter-by-necessity sector led growth in this period, at 6.0%, while lifestyle grew by 5.2%. The Sacramento, Calif.; Portland, Ore.; Seattle; Inland Empire, Calif.; and Los Angeles metros topped the rent-growth list for this period, while Houston fell into last place at 1.9%, with a 0.2% loss in the lifestyle sector.
Multifamily occupancy is at 95.8% for September, with 95.9% occupancy in the lifestyle sector and 95.6% occupancy in the renter-by-necessity sector. Demand for new units is still strong enough to keep pace with new supply, and most metros haven't seen a significant change in occupancy rates. The metro with the greatest occupancy change is Phoenix, at -0.3%.
Trends and Expectations
October’s multifamily rent-growth trends reflect the state of economic development in individual metros. Leading rent-growth metros have job-growth rates far above apartment supply-growth rates, while falling metros have high supply but low rates of job growth. These fundamentals are built upon by the affordability of existing apartment stock.
Sacramento, the leading metro for YOY rent growth, has increased its job market size by 2.5% in the same period, coupled with only a 0.5% increase in apartment stock. The Inland Empire’s second-highest, 7.4% YOY rent-growth rate is fueled by 3.0% job growth and a 1.2% supply increase.
Yardi notes that both of these areas are much more affordable than other locales in Los Angeles and the Bay Area, which has made them attractive to new residents and thus raised rents. On the other end, Houston’s 0.4% YOY rent growth was predicated by a 0.3% job-growth rate and a 2.6% supply-growth rate.
