US Apartment Stocks, Rental Rates: Sept & 3Q 2016

October 27, 2016 Madison’s Lumber Reporter

The US National Multifamily Housing Council released its Apartment Markets Retreat in the October NMHC Quarterly Survey, said Calculated Risk Thursday. The Market Tightness Index fell to 28, the lowest since July 2009 and the fourth quarter in a row showing declining conditions. Meanwhile, the stabilization of the vacancy rate, which has been falling for the past six years, shows that supply has increased to the point at which rent growth can slow. according to Dave Liang at UBS, said Business Insider Monday.

US Apartment Stocks, Rental Rates: September and 3Q 2016

Apartment markets softened across all four indexes in the October 2016 National Multifamily Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions, said Calculated Risk Thursday. The Market Tightness (28), Sales Volume (42), Equity Financing (33) and Debt Financing (38) Indexes all landed below the breakeven level of 50 — showing weaker conditions from the previous quarter.

Vacancy Rates, Apartment Availability

“The growing supply of new apartments, primarily in the Class A space, appears to have finally reached a level to slow the historically high rent growth. Additionally, debt and equity markets are more discerning in terms of what deals they are ready to take on, including the continued slowing of available construction loans,” said Mark Obrinsky, NMHC’s Senior Vice President of Research and Chief Economist.

Almost half of respondents reported looser conditions than three months ago. Likewise, only six per cent noted tighter conditions. The remaining 45 per cent reported no change at all.

RENT GROWTH STABILIZES

The dramatic increase in multifamily structures — such as apartment buildings — has finally caught up with surging demand and will cool off rent growth, a UBS economist said in a note released Monday.

David Liang said Americans opted to rent rather than own at an increased pace after the financial crisis. This large shift led to a constrained supply and rapidly increasing rents. However, that builders had corrected for the increased demand.

Expectedly, multi-family permits have also risen steadily post-crisis, up to a 483,000 pace in 2015. The 2016-to-date level of 413,000 would suggest fewer total starts this year, assuming a 1.5–2.0 month lead time. Given a slowing rate of construction and an approximate building time of 12 months, we expect completions to soften in 2017. The additional units coming to market this year could in theory provide an upper bound to effective rent growth.”

– David Liang, UBS

PROJECTION

For the past two years, Liang said, rent growth has been running well above its long-term average and the rate of inflation.

“In fact, we have already seen signs of slowing rent growth,” Liang wrote. “Post-crisis annual effective rent growth peaked at 7.2 per cent in 3Q 2015 at the national level — it has since slowed to 3.6 per cent in 2Q 2016. This trend is expected to carry over into 2017.”