Renter demand for apartments continued to accelerate in the 3rd quarter of 2017 as the marketplace taken in more than 70,000 systems and the overall national job rate for U.S. apartments continued to trend lower after turning greatly up at the end of in 2015.
“The 3rd quarter (vacancy) numbers are a welcome sign (for owners) after the sharp increase at the end of last year. In general, it was a strong third quarter, which was a good surprise,” said Michael Cohen, CoStar director of advisory services, throughout today’s State of the Multifamily Market Q3 2017 Evaluation and Outlook. “We’re still in the golden era for multifamily, but we’re seeing signs of a steady downturn in the house market.”
Accounting for the slowing house market conditions is the progressive upward pattern in the homeownership rate, which subtracts from the renter pool as millennials and other groups purchase single-family homes. The rate increased by 20 bps in the third quarter to 63.9%. A one-percentage point increase in the homeownership rate would deduct about 800,000 rentals from net absorption, Cohen stated.
Slowing rent growth and sales transaction volume, coupled with flattening prices for home properties, are likewise cutting into house principles.
However don’t blame overzealous designers. Regardless of roaring headings about house oversupply in certain markets, the U.S. has remained in a duration of housing undersupply. While home building and construction stayed at elevated levels during the quarter, general stock of brand-new housing, including single-family homes and for-sale real estate, remains near lowest levels.
“There’s more than enough renter demand to fill 50,000 new systems each quarter,” Cohen said. “Beyond a couple of choose markets such as Austin, Nashville and Washington, DC, the supply wave isn’t really having a dramatic result on more comprehensive U.S. fundamentals.”
Due to the fact that of this fairly regulated level of brand-new supply, some Wall Street analysts continue to prefer apartment or condo REITs that have shifted from an acquisition to an advancement strategy.
“We continue to favor advancement oriented multifamily REITs, as we like the concept of owning new, state-of-the-art assets in the appropriate places at replacement expense,” stated John Guinee, REIT analyst for Stifel Nicholaus. “We see little risk in development of the right product in the right location.”
Once supply of for-sale ramps up once again, however, CoStar experts believe affluent tenants are most likely to wade back into the purchasing pool, especially in lower expense markets.
“For those planning to play the housing cycle, entry level condo or single-family houses represent appealing options, offered some the shifts by millennials we’re beginning to see and will continue to see for rather some time,” Cohen stated.
Executives for publicly traded multifamily REITs verified that while the basic case for apartment or condos stays strong, increasing supply will ultimately increase competitors amongst designers.
Terry Considine, chairman and CEO of Apartment Financial Investment & & Management Company (NYSE: AIV ), told investors recently he’s anticipating the broader economy to continue its steady development while demographics will support continued strong need for apartment or condos.
However, “competitors from new supply will continue, although there will be rotation as to which submarkets are exposed,” Considine stated.
“We’re still seeing a downturn both in terms of starts and shipments in our markets, which has more than to with the overall tightening up of cash for designers and [lack of] qualified building and construction workers,” kept in mind John Williams, chairman and CEO of Preferred Home Communities, Inc. (NYSE: APTS).
Over the past year, some U.S. markets, such as Stamford, CT; Pittsburgh and Honolulu, have seen lower apartment vacancy, in most cases due to lower levels of new supply. On the other hand, higher levels of brand-new house building in Austin, San Antonio, Denver as well as in several Florida markets, such as Fort Lauderdale and Orlando, have actually bumped up vacancy rates in those markets over the last 12 months.
Leasing activity flattened towards the end of the quarter, while lease growth remained favorable however at a lower rate than the 2015 and 2016 peak levels, coming in at 2.4% in the third quarter of 2017. Sacramento led the country in apartment or condo rent growth at nearly 8%, which CoStar analysts conjectured was possibly a ripple effect from the cost crisis in the San Francisco Bay area. Salt Lake City, Las Vegas, Phoenix, the Inland Empire and Orlando also logged strong house rent development throughout the 3rd quarter.
Daily rental rates in Houston jumped almost overnight in the wake of Typhoon Harvey, which removed thousands of systems from house inventory while increasing demand from property owners required from their houses by flooding and storm damage.