SOURCE: Axiometrics Inc.

Axiometrics Inc.

August 19, 2014 13:00 ET

The Year of the Apartment Market Continues

DALLAS, TX--(Marketwired - August 19, 2014) - The U.S. apartment market continued its amazingly strong 2014 in July, as effective rent growth increased once again, occupancy remained steady and fewer concessions were offered, according to Axiometrics' monthly apartment market trends report.

Axiometrics, the leader in apartment market research and analysis, noted year-to-date (YTD) effective rent growth leads that of all post-Great Recession years for the fourth straight month and is just 10 basis points (bps) away from the recovery's peak YTD figure, reached in 2012.

Annualized effective rent growth was 3.8% in July, a 12 bps increase from the 3.7% recorded in June and a 40 bps climb from the 3.4% of July 2013.

"Effective rent growth has increased for five straight months, but is still a long way from the summer of 2011, when the rate was in the 5% range," said Stephanie McCleskey, Axiometrics Vice President of Research. "On the other hand, it's becoming more and more likely that 2014 will be the strongest overall year for the apartment market since the recession ended. This is the year of the apartment."

Average effective rent in July was $1,163.10 per month, an increase of $7.40 from June's figure.

Concessions Continue Falling

Concession levels set another post-recession low, dropping to an average of 0.7% in July from 0.8% in June. Dollar-wise, that translates to $8.70 on a 12-month lease. To compare, 8.33% is one month's free rent.

The asking rent growth and effective rent growth lines in the accompanying chart have almost parallel movement since November 2013, with a very slight narrowing of the gap between them in July. Asking rent growth in July was 3.4%, some 42 bps lower than effective rent growth.

"The consistency in the gap between asking and effective rent growth can be attributed to the descent of concessions as a large factor in the current apartment market," McCleskey said. "With new deliveries being absorbed at a high rate, landlords at many properties -- especially Class A and Class B+ buildings -- can rent their units without offering anything beyond the location and the amenities."

The increased use of automated revenue management systems also helps diminish concessions, since properties using that type of software do not tend to offer concessions.

"Are the days of 'one month's free rent' and '$100 cash back' over?" McCleskey asked. "For now, in a strong apartment market, probably. Concessions could increase in a future down cycle, but likely not to the extent of late 2009, when the dollar value of concessions was more than $70 per month."

YTD Rent Growth Near Recovery's Peak

Year-to-date effective rent growth was 5.1% in July 2014, up from 4.5% in June and 30 bps ahead of the 4.8% recorded in June 2011, the next strongest post-recession year. The gap between 2014 and 2011 is unchanged from May and June.

July marks the fourth straight month in which 2014 has settled in as the strongest year for the apartment market during the recovery.

"The U.S. apartment market would have to go into significant decline in order for 2014 to give up its No. 1 position by the end of the year," McCleskey said. "YTD effective rent growth need increase by only 10 bps to reach the post-recession peak of 5.2% set in August and September 2011."

Occupancy Remains at Highest Point

Occupancy remained at 95% for the third straight month, the highest level since April 2008.

"The steady occupancy portrays a market that is absorbing all the new supply being delivered this year, and settles the question (at least for now) whether overbuilding is generally taking place," McCleskey said.

Class A Rises to No. 2

Effective rent growth for Class A apartment properties -- those with the top 20% highest rent -- continued its steep rise in July 2014, reaching 3.6%. That's a 40 bps rise from June's rate of 3.2% and an increase from the 3.4% of July 2013.

Though the year-over-year increase seems slight, the July 2014 rent growth figure was significant for several reasons:

  • The Class A rate was the highest since the 3.6% rate of February 2013.
  • It means that Class A effective rent growth made up the ground it lost during its deep dip in late 2013/early 2014. The rate dropped as low as 2.1% in November 2013 and has risen steadily for five straight months.
  • The July 2014 rate put Class A above Class C properties -- those with the 20% lowest rent -- for the first time since March 2013. That was also the last month that Class A wasn't in last place among the three general asset classes that Axiometrics identifies.

Class C was just percentage points behind Class A, also registering at a rounded 3.6% effective rent growth, a decline from the 3.9% in June and 3.8% in July 2013, when it was the strongest asset class among the three.

Class B remained the strongest asset class for the fourth straight month, with annualized effective rent growth of 4.3% in July, an increase from 4.1% in June and 3.5% in July 2013, when it was the weakest asset class among the three.

"The increases in effective rent recorded for class A and B in the past few months can be attributed to ongoing strong demand for higher-rent apartments as job growth continues its positive trend," McCleskey said. "Another factor is continued high occupancy, especially among millennials."

Sun Sets, Rents Rise in the West

Data for metropolitan areas show that the Pacific Coast is driving much of the national increase in effective rent growth.

Oakland once again led Axiometrics' top 50 apartment markets in effective rent growth with an annualized rate of 10.3%, while Bay Area neighbor San Jose led in occupancy at 96.9% and was No. 3 in rent growth.

The top 10 metros nationally included seven Pacific Coast markets, five of those in California -- Oakland, San Jose, Sacramento, Oxnard and San Francisco. Two other California markets -- Riverside and Los Angeles -- weighed in at 11 and 15, respectively. Seattle and Portland, OR, also were in the top 10.

Only three of the top 15 were east of the Mississippi River: Atlanta, Miami and West Palm Beach. Denver, Houston and Fort Worth rounded out that list.

Northeastern markets continued to underperform the national average. Washington, DC effective rent growth was 0.0% for the second straight month.

          
   Annual Effective
Rent Growth
 Occupancy
Rate
 Revenue
Growth
Rank*  MSA  Jul-13  Jul-14  Jul-13  Jul-14  Jul-13  Jul-14
1  Oakland, CA  10.3%  10.3%  96.9%  96.5%  9.9%  10.8%
2  Denver, CO  7.5%  9.0%  95.7%  96.2%  8.0%  9.7%
3  San Jose, CA  6.2%  9.0%  96.7%  96.9%  6.4%  9.1%
5  Atlanta, GA  4.2%  7.4%  93.3%  94.1%  5.1%  8.4%
6  Miami, FL  6.0%  7.1%  95.6%  95.2%  5.6%  7.5%
7  Seattle, WA  6.8%  6.9%  95.8%  96.1%  7.1%  7.3%
9  Portland, OR  6.6%  6.7%  96.3%  95.8%  6.0%  7.6%
10  San Francisco, CA  7.9%  6.3%  96.1%  96.0%  7.8%  6.9%
13  Houston, TX  6.0%  5.2%  94.4%  94.8%  6.4%  6.2%
15  Los Angeles, CA  3.9%  5.0%  95.0%  95.8%  4.7%  4.7%
17  Austin, TX  4.7%  4.8%  95.4%  95.3%  4.5%  4.9%
18  San Diego, CA  3.8%  4.6%  96.2%  96.3%  3.9%  5.0%
21  Orlando, FL  3.6%  4.3%  94.9%  95.0%  3.7%  4.9%
22  Dallas, TX  4.2%  4.3%  95.0%  94.8%  4.0%  4.8%
National  3.4%  3.8%  94.7%  95.0%  3.7%  4.2%
34  Boston, MA  3.5%  2.7%  95.9%  95.6%  3.3%  2.7%
45  New York, NY  2.6%  1.1%  96.8%  96.8%  2.5%  1.1%
49  Washington, DC  -0.2%  0.0%  95.1%  95.2%  -0.1%  -0.5%
Best of the rest
1  Santa Rosa, CA  7.5%  11.5%  97.4%  97.0%  8.5%  11.1%
2  Odessa, TX  18.9%  10.0%  97.8%  98.4%  18.1%  10.5%
3  Naples, FL  10.0%  9.9%  96.3%  96.5%  10.2%  10.1%
4  Vallejo, CA  6.4%  9.0%  95.7%  96.4%  8.7%  9.6%
5  Cape Coral, FL  11.0%  8.5%  93.7%  95.2%  11.3%  10.0%
 
*Rank is based on annual effective rent growth in July 2014 among Axiometrics' top 50 U.S. markets. Only markets in the top 121 MSAs with more than 4,000 units were used for the ranking. Axio tracks properties in more than 450 MSAs around the country.
 
Source: Axiometrics Inc.
 

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Axiometrics improves property and portfolio performance for apartment investments. Confident investment decisions begin with reliable, timely information. No one has more accurate, detailed, and up-to-date research on the apartment and student housing markets. Learn more at www.axiometrics.com or by calling 214-953-2242.

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