Experts are using the latest data to recommend that landlords should hold off on cutting apartment rents. Many property owners are concerned that increasing supply is going to force them to trim their rental rates, but data from Reis, MPF and Marcus and Millichap show that supply and demand remain in balance overall, which means that it may be too soon to lower rates. Effective rents are actually on the rise and the many sources report vacancy rates are falling, offering evidence that there may even be time to raise rents before having to respond to new competition. For more on this continue reading the following article from National Real Estate Investor.
Apartment managers should not rush to cut rents, even if a flood of new apartments are expected and the construction cranes loom over their properties. If vacancies are still low, there still may be time to raise rents before competition for tenants force existing apartments to trim their rental rates.
“You can take the haircut in rents too soon,” says Greg Willett, vice president for MPF Research.
As the national economy strengthens, demand for apartments is improving overall, even though property managers worry about the rising tide of new apartments. So far, demand and supply are roughly in balance, according to recent reports from MPF, Reis, and Marcus and Millichap. But the strongest markets for rent growth in 2013 and 2014 have been and will be secondary markets overlooked for now by the increase in new construction.
Stronger than usual end to 2013
The fourth quarter turned out better than most analysts expected, with a relatively strong outlook for 2014. The percentage of vacant apartments rose to 5 percent according to MPF, up from 4.6 percent in the third quarter. Reis, however, measured the vacancy rate as improving in the fourth quarter to 4.1 percent, from 4.2 percent in the third quarter.
Both research firms say apartments benefited from unusually strong demand at the end of the year, which led to fewer net move-outs than usual.
“Not even the seasonal weakness normally observed during the fourth quarters of calendar years had much if any impact on the market dynamics,” according to Ryan Severino, senior economist for Reis.
Strong demand has allowed the apartment markets to absorb high levels of new supply. “Four years after the advent of a recovery in the apartment market, newly completed units continue to be absorbed,” says Severino.
But more new units are coming. MPF now expects a total number of 234,700 new apartments to open in the 100 biggest metro areas in 2014. Fortunately, researchers also expect stronger job growth in 2014 as the national economy improves. “It looks like that burst of deliveries is coming at exactly the right time,” says Willett.
Core, urban apartment markets that have the strongest economic growth tend to be the places where the most new apartments are under construction. Those core markets have a moderately positive outlook for 2014. The strongest apartment markets in 2013 and 2014 are markets and sub-markets with strong job growth nearby and little new construction.
Denver was in a great position in 2013—though a lot of new apartments will open in 2014. Apartment developers are expected to complete 10,500 new units of multifamily housing in 2014. That’s more than twice the 4,900 units that opened in 2013.
“Should they be concerned about a lot of new supply? Yes!” says Willet. However, Denver’s apartment managers are taking advantage of low vacancy rates and little competition before the new apartments open later in 2014. The percentage of vacant apartments in Denver was still just 3.8 percent in the fourth quarter, according to MPF. Apartment managers in Denver grew rents 7 percent in 2013.
Suburban markets primed for 2014
Suburban apartment markets are also dodging new construction, with relatively few projects underway. As a result, suburban apartments are likely to beat the core urban apartment markets for rent growth in 2014, even though the strongest job growth is likely to be in the urban core.
“The best performers for rent growth and occupancy tend to be suburban,” says Willet. “That will be the case even more so in 2014.”
That’s because the top markets for job growth, like the New York metro area, are also the places that have the most new construction, where developers are building massive qualities of urban, high-end apartments.
“We anticipate above average rental growth in many secondary and tertiary markets,” says John S. Sebree, vice president for and national director of the National Multi Housing Group for Marcus & Millichap.
Class-B and class-C properties are also likely to be spared from competition, since most new construction is targeted at high-end renters. A new high-rise is unlikely to steal renters from a class-C property next door.
“The Bs and Cs are actually showing very strong rent growth because they have lagged in rent cycle growth so far and they have less competition for their tenants,” says Hessam Nadji, senior vice president and chief strategy officer for Marcus & Millichap.
This article was republished with permission from National Real Estate Investor.