National 2018 Q2 Apartment Market Update
The apartment boom cycle is in its ninth year, and there’s little question now that peak rent growth is in the rearview mirror. New supply and moderating rent growth are dominating the storylines at industry events and in the media.
But the story of the U.S. apartment market is still undoubtedly a very good one.
Yes, there is a lot of new supply. Trailing 12-month apartment deliveries topped the 300,000-unit mark for the seventh consecutive quarter in 2nd quarter 2018. Prior to the recent run, supply levels hadn’t approached the 300,000-unit threshold since the 1980s.
But getting less-than-deserved attention is that apartment demand remains remarkably robust – registering above 300,000 annually as of 2nd quarter. That was backed by a very strong quarterly performance, with 132,766 units absorbed in the April to June timeframe.
That was on par with the same period for each of the prior three years, confirming there’s no slowdown in demand. For all the talk of 30-something-year-old Millennials leaving apartments to buy or rent homes (and yes, that is happening), skeptics have conveniently ignored tailwinds coming from a continually growing pool 20-somethings – plus strong growth in the older adult renter pool.
As a result, U.S. apartment occupancy rates continue to beat expectations, holding above 95%. In 2nd quarter, occupancy ticked up 30 basis points (bps) to 95.4%. Contrary to oversupply concerns, overall occupancy rates nationally have either held flat or ticked upward now in five of the past six quarters.
So while rent growth has indeed moderated from the peaks around 5%, the U.S. apartment market continues to notch very solid numbers. As of 2nd quarter, year-over-year rent growth came in at 2.5% – marking six straight quarters in the mid-to-upper 2% range. Softer performances continue to be seen in Class A and in urban core submarkets, which continue to face supply growth rates far exceeding suburbs. RealPage expects the bifurcated performance trends to persist over the next few years, with overall performance boosted by suburbs in growth markets with strong demand drivers and true barriers to entry.
Sales volumes for investment-grade U.S. apartments through the first five months of 2018 are up 10% compared to the same period in 2017, with $53.7 billion traded, according to our partners at Real Capital Analytics.
Apartment cap rates continue to hover in the mid-5% range, on average, hitting 5.5% in May, per RCA.
New lease trade-out (or lease-over-lease rent growth) in 2nd quarter 2018 trended upward over the same period in 2017, from 4.5% to 5.2%. This was an encouraging change from a previous pattern of deceleration. Additionally, renewal trade-out held steady at 4.4% while retention rates bumped up 80 bps year-over-year to 51.9%.
Smaller markets continue to dominate the rent growth leaderboard. Midland/Odessa continues to enjoy a big bounce back following an equally big drop off, with same-store rents for new leases up 35.6% year-over-year. Next on the list, with growth rates from the upper 6% to upper 7% range: Reno, Santa Rosa, Myrtle Beach, Palm Bay, Tacoma and Boise. The top major market? Orlando, with rents up 6.5%.
RealPage Market Analytics Team | July 10, 2018