RENT GROWTH ENCORE?
WHAT’S IN STORE FOR 2016
By Paul Fiorilla, Associate Director of Research, Yardi Matrix
After a couple of fat years in which apartment rent growth soared beyond 6 percent nationally, the big question for the market is: Can it last?
Over the long haul, the answer is “No,” of course. But in the meantime, 2016 should produce another year of solid rent gains, if not as frothy as 2015. Yardi Matrix projects 4.6 percent rent growth nationally, led by many of the hot markets that produced outsize gains in 2015. While the forecast represents a deceleration from the 6.5 percent gain recorded in 2015, rent growth will, nonetheless, outpace the eight-year average, satisfying most property owners. Three cities that topped the rankings in 2015 also boast the strongest rent growth forecasts for 2016: Denver (11.2 percent), San Francisco (11 percent) and Portland (9 percent). All of these metros are home to thriving intellectual hubs led by technology firms and offer the jobs, lifestyle amenities and climate that aract Millennials. The top five is rounded out by Sacramento (8.8 percent) and Austin (8 percent), which will repeat strong gains made in 2014. Austin is thriving as a haven for young, highly educated workers, which enables property owners to fill units despite a huge increase in supply (5.1 percent in 2016). Sacramento is benefiting from its proximity to markets with strong rent gains and the dearth of new supply, which has produced an extremely tight rental market despite relatively weak demand.
Similar to 2015, markets across the West and South should generate above-trend rent gains next year. Western markets expected to post some of the most robust rent growth include Seale (7.2 percent), San Diego (6.5 percent), the Inland Empire (5.4 percent), Phoenix (5.4 percent) and Orange County (5.3 percent). Southern markets with a forecast rise above the U.S. average include the North Carolina Triangle (7.2 percent), Dallas (7 percent), Atlanta (6.8 percent), Orlando (6.4 percent) and Jacksonville (5.6 percent).
The news isn’t as good for the Mid-Atlantic, Northeast and Midwest, regions that have generally underperformed in recent years due to ongoing population and job growth shifts to the West and South. Of the 111 markets forecast by Yardi Matrix, Richmond and the Twin Cities form the boom of the top 30, with expectations for essentially flat rents in 2016. Washington, D.C., ranked 27th with an uptick of 0.8 percent anticipated next year. Washington’s problem isn’t demand: The job market is strong and the population is rising. However, the metro will be inundated with new supply as developers deliver approximately 8,000 units, adding 3.7 percent to local apartment stock. Other Mid-Atlantic and Midwest metros with projected below-trend rent growth include Philadelphia (1.3 percent), Chicago (1.9 percent), Baltimore (2.3 percent) and Kansas City (3.5 percent).
Our forecast is underpinned by expectations for another year of moderate economic growth in 2016, combined with continued favorable demographic trends. We expect GDP growth to remain in the mid-2 percent range through 2016, with employment gains of roughly 200,000 jobs per month. Although a number of dynamics could derail the protracted U.S. recovery—the economic slowdown in China and emerging markets, a recession in Europe, an increase in U.S. interest rates that roils financial markets, or spreading conflict in the Middle East and elsewhere—the most likely scenario remains that the U.S. economy will keep rolling at a middling pace.
Our optimistic forecast is based on strength exhibited by a variety of economic segments: Pent-up renter demand, job growth and the coming of age of Millennials, which will support the formation of 1-plus million new households over the next five to 10 years. Housing markets are gradually returning to life, with prices and construction rising steadily, if not vigorously in some markets. Automobile sales topped 18 million units in 2015, which represents good news for suddenly rebounding Detroit and will produce a positive ripple effect through the remainder of the Midwest. Technology and healthcare continue to add jobs in key markets, and consumer spending is rising at a solid clip.
What’s more, after adding 14 million jobs over the past six years, the economy is fast approaching full employment. Not only has the unemployment rate slipped below 5 percent for the first time since April 2008, but the U6 underemployment rate has dipped below 10 percent, after peaking at more than 15 percent during the recession. Although what constitutes full employment can be debated, the reduction of slack in the labor market points toward wage inflation, which has largely eluded workers even with the impressive number of jobs created since 2010. Wage growth is a contributing factor that enables tenants to afford higher rents.
Growth in multifamily supply will remain strong in 2016. Across the 111 markets tracked by Yardi Matrix, 312,000 units are slated for completion next year, almost equivalent to deliveries in 2015. Additions to apartment stock in 2016 are expected to provide a 3.7 percent lift to existing inventory.
While apartment construction has accelerated during the past few years, the sector is coming off a period of historically low supply growth, which began in 2010 and endured through the beer part of 2013. Furthermore, today’s historically high occupancy rates and expectations for strong renter demand, the result of elevated household formation and reduced homeownership rates, help to quash supply-side concerns. This year, the greatest additions to apartment supply as a percentage of existing stock can be found in Nashville/Knoxville (6.6 percent), Seale (6 percent), Los Angeles (5.2 percent) and San Francisco and Austin (5.1 percent). These metros, however, are benefiting from one or more of the following trends: a steady influx of young professionals, low housing affordability, exceptionally tight apartment market conditions and above-average job creation. As a result, it would take more than a year or two of rapid supply growth before conditions softened enough for landlords to lose their upper hand in rent negotiations.