When COVID-19 hit in mid-March, U.S. apartment operators were quick to cut rents as demand all but evaporated. And now, as leasing volumes surge, rent cuts are quickly disappearing in most big U.S. metros – with the notable exception of most of the nation’s largest Gateway markets.

In the week ending June 20, executed rents for new leases inched up 0.08% compared to the same time last year. While this growth is minuscule, it’s a sharp departure from three months of steady rent declines. At one point in mid-April, executed rents nationally were down as much as 6.4%.

Rents are rebounding as new lease volumes have surged. In the week ending June 20, total new lease volumes were up a remarkable 18.6% compared to the same time last year in the same-store dataset.

Executed rents reflect prices in actually signed leases sourced from same-store rent rolls in millions of units running on the RealPage platform. Executed rents are a real-time indicator of market movement – very different from asking rents or “effective rents,” which tend to be lagging indicators reflecting all available units without visibility into what’s signed versus what’s offered. Executed rents not only include concessions (which are often unadvertised and offered during lease negotiations) but also factor in lease term lengths since rents can vary based on the term.

Continuing a pattern seen since COVID-19 first hit, large coastal markets are generally the exceptions to the rule. Executed rents dropped by double digits over the last week in Boston, New York, Los Angeles, San Jose, and Oakland. Rents were also down sharply in Minneapolis/St. Paul and San Francisco. In general, these markets are also not benefiting from the rebound in new lease demand.

Sun Belt and Midwest markets are driving the pricing rebound, just as they have on leasing volumes. Among the nation’s top 50 markets, 30 recorded positive growth in executed new lease rents during the week ending June 20. The largest gains came in what would typically be described as slow-and-steady markets, including Virginia Beach, Memphis, St. Louis, Greensboro, Jacksonville, Columbus, Tampa, Cleveland, and Kansas City.

Nashville was also a strong performer in spite of concerns about its exposure to the travel and leisure industries. Three West Coast metros – Riverside, Sacramento, and Portland – broke the mold and outperformed their peers.

Most hot-growth Sun Belt markets recorded flat to modest gains in new lease pricing. That included Dallas, Fort Worth, Charlotte, Phoenix, Houston, Denver, and Las Vegas. Those were perhaps the most impressive results given high lease-up volumes in most of those markets, reflecting the resiliency of those high-demand Sun Belt metros.

However, a spike in COVID-19 cases in many of those metros will provide a big test over the next few weeks. It’s too early to conclude that new lease pricing has effectively recovered, particularly given continued uncertainty about the state of the economy and the looming expiration of expanded unemployment benefits coming at the end of July.

New lease pricing fell 3% to 5% in a handful of key markets: Atlanta, Washington, San Antonio, Philadelphia, Miami, Orlando, and Austin.

While new lease pricing shows signs of recovering, renewal lease pricing remains volatile. Renewal pricing returned to positive territory for much of May before dropping back down in June. In the week ending June 20, executed renewal rents dropped 1.9% compared to the same time last year. The cuts could reflect public sensitivities around renewals, as well as operator priorities, focused on high occupancy and longer lease terms.

 

 

Source: RealPage by Jay Parsons Posted Jun 23, 2020

The death of the small apartment building
Q4 2015 Apartment Trends

 

Separate studies issued this week share the same conclusion that demand for rental apartments and other housing options will stay at elevated levels largely due to the continued robust household formation and limited affordable housing options, especially for detached single-family houses.

The first study was co-commissioned by the National Apartment Association (NAA), sponsor of NAA Education Conference & Exposition running this week through Friday at the Georgia World Congress Center in Atlanta. The report projects that based on current trends, an additional 4.6 million new apartment units will be needed by 2030 to keep up with demand as younger people delay marriage, the U.S. population ages and immigration continues.

Continue reading “Elevated Demand for Apts. Expected to Remain Due to Household Formation and Lack of Affordable Housing Options”

reis-apartments

Armageddon on Hold for Four Quarters

  • The national vacancy rate for multifamily remained moored at 4.4% in the third quarter, unchanged since the fourth quarter of 2015 despite the large number of new deliveries.
  • This confirms what we have posited thus far about demand remaining robust even as supply growth increases. With that said, this equilibrium is tenuous and likely won’t last.
  • For markets that experienced either a large increase in rents over the last few years, or a steady influx of new buildings – or both – landlord pricing power is being tested.
  • Market conditions in the apartment market softened a bit in the third quarter, a period they generally see the highest activity and strongest rent growth.

reis-office

On Pause, Those Fine Hopes for 2016

  • We started 2016 feeling fairly optimistic about the prospects of the office sector. With the national vacancy rate declining by 40 basis points last year, we were poised to finally see an acceleration in improvement in fundamentals for the office sector.
  • With national vacancies remaining stuck at 16.0% in the third quarter, it appears that optimistic hopes about the prospects of the office sector have been put on hold – at least till the fourth quarter.
  • While the numbers disappointed in the quarter, much of the decline was a lagged response to tepid employment and economic conditions in the first quarter.

reis-retail

Two Steps Forward, One Step Back

  • The national neighborhood and community center retail vacancy rate increased by 10 basis points during the third quarter to 10.0%; the retail mall vacancy rate decreased by 10 basis points to 7.8%.
  • Both minor changes represent a reversal in the second quarter when the neighborhood and community center vacancy rate decreased and retail mall vacancy increased, both by 10 basis points.
  • Neighborhood and community centers have lagged due to the slow growth in median household income that has kept a lid on discretionary spending over the last few years.
  • Both neighborhood and community centers and regional malls face competition from newer and fresher retail concepts as well as e-commerce.

reis-industrial

A Downshift in Demand

  • The momentum in the industrial market slowed a bit as demand growth decelerated. Nevertheless, vacancy held steady in the warehouse and distribution sector as net absorption exceeded new construction by a small margin.
  • Although the industrial sector has outperformed other property types in terms of occupancy growth, the down-shift observed in the third quarter puts the asset class on par with office and retail which followed a similar pattern.
  • Echoing the sentiment we expressed last quarter, the slow but steady rate of growth should continue going forward as most metros continue to see demand growth for industrial space.
  • Vacancy declined in the Flex/R&D subsector largely due to a sharp drop in new construction.
  • Net absorption slowed somewhat but remained positive. Market rents increased but also at moderate rates, similar to the second quarter.
  • Once again, every metro posted positive rent growth for the quarter, although some outperformed others.

reis-construction

New Construction at the Cusp of Economic Change

  • The third quarter of 2016 was marked by a somewhat consistent trend – a pronounced pullback in new completions, relative to recent quarters.
  • This is readily apparent in the apartment and office sectors, but less so in neighborhood and community shopping centers where supply growth has been anemic for several years anyway.
  • What caused this pullback – especially in multifamily where we were expecting a deluge in new supply?
  • Any pickup in activity for new completions is likely to be driven by projects that are already in the pipeline, just waiting to come online in what may well be a deluge for the apartment sector in the fourth quarter.

Source: REIS

Q2 2016 Apartment Cap Rate Trends

Q2 2016 Apartment Cap Rate Trends

 

Just when we think the apartment market can’t get any stronger, we hit the equivalent of 88 miles per hour and see cap rates reaching a new record-low level. We observe that the mean cap rate, illustrated by the dark blue line in the chart, declined by 10 basis points to 5.7% during the second quarter. The market continues to reach record-low levels and the average commercial real estate cap rate has now been below 6% for all of 2016.

It remains remarkable that this far into an economic expansion that investors are willing to pay such a premium for apartment properties. Certainly, the low-yield environment around the world plays a big role, especially given the relative strength that we have observed in apartment fundamentals. But ultimately what this shows is that investors, despite new supply growth, continue to be bullish on the apartment sector, even if only on a relative-value basis.

As the mean cap rate has continued to fall over time, it is unsurprisingly pulling down the 12-month-rolling cap rate, depicted as the red line in the graph. Due to the strong downward trend in the market, that metric has now fallen below 6% for the first time ever, reaching 5.9% during the second quarter. This demonstrates that these sub-6% cap rates are a longer-term, durable phenomenon and not a one-quarter anomaly.

The downward trend in cap rates for multifamily properties is also dragging down the historical long-term average cap rate, shown as the dashed line in the chart, which has now fallen to 6.5%.

The environment remains ideal for apartment cap rates to remain at or near historically low levels and possibly fall even further. Nothing fundamental has changed between this quarter and last quarter to alter that view. While hearing anecdotally from clients that they are starting to balk at such high apartment prices, that looks more like the exception these days based on the cap rates for properties in the market that are actually trading.

Source: REIS  Ryan Severino on Aug 29, 2016