Apartment Rents Growing Faster In Secondary Markets

Apartment rents will grow faster in many secondary markets than in the top primary markets like New York City and Los Angeles, according to 2014 projections from data …

Apartment rents will grow faster in many secondary markets than in the top primary markets like New York City and Los Angeles, according to 2014 projections from data firms Reis Inc. and Pierce Eislen.

“There has been a tremendous amount of rent growth and growth in value in these markets,” says Robert Kadoori, senior vice president for debt and structured finance with CBRE capital markets, which quoted the Pierce Eislen projections in a recent multifamily presentation.

Apartment investors have been turning toward secondary markets this year as they look for higher yields on their investments. Rising rents will make those markets even more attractive.

In 2014, the top 10 metro areas for multifamily rent growth will not include New York City, Los Angeles, Boston or Chicago, according to projections from Reis, a New York City-based research firm. Instead, rents are set to grow more quickly in several secondary markets. Denver, Colo.,  Dallas, Houston and Austin, Texas, and Nashville, Tenn. are all poised to grow their average rents by more than 4 percent in 2014, according to Reis. These secondary markets all have local economies dependent on quickly growing industries. “The tech and energy markets are very prevalent here,” says Brad Doremus, senior analyst with Reis.

Projections from Pierce Eislen, an affiliate of Yardi Systems Inc., spell even stronger growth for average apartment rents in markets including the Southwest Florida coast (9.3 percent); Portland, Ore., (6.0 percent) and Atlanta (6.0 percent). “Many of those economies are recovering. There seems to be a consensus that their time has come,” says CBRE’s Kadoori.

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Fading appeal

Most of the famous “sexy six” apartment markets are further down the list for rent growth, if they appear at all. New York City, for example, is projected by Reis to have 4 percent rent growth this year, with a multifamily vacancy rate of just 2.5 percent, down 0.2 percent year-over-year. The projection of 4 percent rent growth is impressive, but still less than the rent growth expected in leading secondary markets. The economy of New York City is more diversified and includes a great deal of financial services firms. Apartment rents are also already high in the core apartment markets, limiting potential for big rent hikes.

Seattle and seemingly every town in the San Francisco Bay Area still top the lists for projected rent growth in 2014, likely due to the strength of the tech business in their local economies.

Multifamily investors have been paying attention to the new trends.

“We have seen quite a bit of attention turn from the big six markets,” says Kadoori. “The core investors look at the secondary markets and their rising economies and see downside protection.”

A long list of metro areas is sharing the positive attention. Some brokers refer to these towns as “NFL cities,” because metros areas prosperous enough to feature a National Football League team also seem to be large enough to share in the quickening recovery.

However, investors are still most interested in class-A properties in the top sub-markets.

“The gulf between the two ends of the market is wider than I would expect,” Kadoori notes.

This article was republished with permission from National Real Estate Investor.


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