Rent Growth Rate Slows in Some Urban Centers
Axiometrics reports that, while the overall growth trend remains positive, many metro areas across the U.S. are beginning to show moderating annual effective rent growth as compared to very strong growth two years ago.
The trend is especially noted in the urban core of many markets where, after strong rent growth in 2012, new apartment construction accelerated.
“As we get further into 2014, concern remains about which Metropolitan Statistical Areas (MSAs) will become oversupplied as new supply outpaces demand,” said Jay Denton, vice president of research for Axiometrics. “We have also seen a divergence in rent growth performance by asset class with Class A properties once again generating the highest rent growth numbers, reversing a trend where Class C apartments had shown the strongest growth in recent months. It will be interesting to see if Class A properties can keep up the momentum in the face of 2014 deliveries.”
Effective Rent Growth and Occupancy
Axiometrics’ latest report shows that annual effective rent growth in January was essentially flat as compared to December’s rate of 2.7%. One year ago the annual growth rate was 3.6%, and it has slowed in eight of the last 12 months. The national rent growth rate peaked at 5.3% in June 2011.
Out of the top 121 MSAs, 24 had annual effective rent growth in January greater than 5.0%, with markets in Florida, California and Colorado continuing their recent strong increases. Naples ranked first with an annual growth rate of 14.5%, followed by Santa Rosa at 9.2% and San Jose at 8.8%. Other MSAs with an annual growth rate greater than 5.0% included:
Portland, OR (8.6%)
Oakland, CA (8.3%)
Miami, FL (7.9%)
North Port, FL (7.5%)
Boulder, CO (7.2%)
Denver, CO (7.1%)
San Francisco, CA (6.1%)
Washington, DC continues to rank as one of the weakest MSAs with an annual rate of -1.8%. Philadelphia had its fifth consecutive month of negative annual rent growth, measuring -1.5% in January, while New York had negative growth for a third month at -0.8%.
In January, the occupancy rate of 94.1% was down 5 basis points (bps) from December 2013 but up 5 bps from January 2013. Currently, 40 of the top 121 MSAs have an average occupancy rate greater than 95.0%.
Axiometrics’ 2014 forecast predicts occupancy will peak in mid-2014 before falling off in 2015. There is evidence, however, that occupancy might have lost more momentum in fall and winter 2013 compared to the prior year. There is uncertainty whether 2014’s peak occupancy rate will eclipse 2013’s peak, especially with new supply coming online.
Diverging Asset Classes
Class B properties continued to generate the strongest annual effective rent growth in January, while Class A assets continued recovering from slowing growth stemming from new supply delivered in 2013. The annual effective rent growth of luxury, or Class A, apartments slowed to 3.1% in the middle of 2013 as compared to a 5.2% growth rate during the same period of 2012. In January, Class A apartments generated effective rent growth of 2.91%, Class B generated 3.01% growth and Class C 2.33% growth.
Nationally, Class C effective rent growth has fallen off dramatically since November 2013. But some of the markets contributing to this decline still experienced overall positive growth. For example, Boulder reported annual effective rent growth for Class C apartments of 21.3% in October 2013, but by January 2014, that rate had fallen to a still-impressive 14.1%, which is among the top-performing markets in the country. Likewise, San Jose’s Class C effective rent growth measured 11.4% in December 2013 but had slipped to a rate of 8.6% in January, still high on a national basis.
Urban Core Concerns and Top- and Bottom-Performing Markets
Many metro areas, particularly in the urban core, generated outsized effective rent growth in 2012, thus spurring a rise in construction. As new units have delivered in these submarkets, there has been a decline in rent growth to more moderate levels. A good example of this are Downtown/Logan Circle and Rosslyn/Ballston, two submarkets in Washington, DC, that experienced negative rent growth due to new construction.
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