Multi-family Rent Growth Reaches Six-Year Low

by | Jun 8, 2017

Though May was the third consecutive month national multifamily rents increased, the rate at which rents grew continued to cool. Apartment rents rose 1.5% in May, the lowest year-over-year increase in rent growth since 2011, according to Yardi Matrix’s monthly survey of 121 markets.

The research firm said this slowdown is expected as the market is unable to sustain the record levels of growth experienced in the past few years. A large wave of new supply expected to come online later this year is also impacting rents. Pexels/Unsplash Yardi Matrix predicts multifamily supply will peak this year, with 360,000 new apartment deliveries expected to come online in Q3 and Q4. Though supply will remain robust in 2018 and 2019, Yardi predicts the pace will slow. Already the firm notes a slowdown in capital being deployed for multifamily construction, resulting in a delay in projected inventory growth for 2018. “One of the things we see is the delay of capital. Projects intended to be started are being delayed … primarily in larger gateway cities like Houston, Chicago and Los Angeles,” Yardi Director of Operations Doug Ressler said, adding that investors are taking a wait-and-see approach to determine how economic conditions and rising interest rates will impact cap rates and the overall market.

A Tsunami Of New Supply Much of this year’s apartment delivery will be in the form of high-end Class-A apartments and will be concentrated in a handful of rapidly expanding markets, including Charlotte, Nashville, Austin, Houston, Miami and Denver. There remains a large disparity between the luxury apartments coming online and the working-class Americans who need units. This divide is driving renters from expensive core markets with inflated rents like San Francisco and New York to more financially manageable areas. This is particularly pronounced on the West Coast. Sacramento, the Inland Empire and Los Angeles lead the nation in rent growth.Sacramento in particular is benefiting from a migration of renters who cannot afford the Bay Area and Silicon Valley’s expensive housing prices. “The inability to purchase single homes we believe are driving people inland to the Sacramento market,” Ressler said. “This market has many issues such as zoning … which can take] between 19 to 36 months to get property going. These limitations are driving rents.”

Millennials To Drive Demand Through 2024 Despite the crush of new apartments, apartment demand remains strong, driven in large part by millennials. The largest generation in the world is aging (they now fall between the ages of 20 and 35) and will incrementally shift demand from renting to homeownership as they begin to start families, but a large portion of the group has just barely hit prime rental age. In its economic outlook for the year, Yardi Matrix reported the number of millennials expected to hit the prime renting ages of 20 to 34 will exceed 2 million this year. That is nothing compared to the whopping 70 million expected to peak in 2024 — which means multifamily can expect solid demand from millennials for at least the next seven years. Ressler said the sector is also starting to see an influx in demand from baby boomers, particularly on the Southwest Florida coast, and in Orlando and Phoenix. “We’re starting to see those markets where boomers want to divest themselves of single-family assets and move into rental family types that are less maintenance” Ressler said.

About the Author

Bruce A. Kahn, CCIM, CPMBruce A. Kahn, , CCIM, CPM, Principal, Designated Broker, Foundation Group is a Managing Director of Foundation Group Investment Real Estate Solutions, a full-service property management and brokerage company. He has earned the designation of CCIM (Certified Commercial Investment Member) issued by the CCIM Institute, and is a CPM (Certified Property Manager) with the IREM (Institute of Real Estate Management). For further information or for a property analysis, please contact him at 206-324-9424 or by email.