DALLAS — The nation’s apartment market continued to gain strength in the third quarter of 2014, according to early release figures from Axiometrics, a Dallas-based apartment market research company. Annualized rent growth reached 4 percent for the first time in almost two years, while quarterly effective rent growth increased over the third quarter of 2013.
Occupancy also increased, to 95.1 percent, higher than the 95 percent mark reached last year, which had been the highest since the first quarter of 2001.
Landlords Continue Pushing Rents
Effective rent growth increased by 1.6 percent over the second quarter of 2014 on a quarter-by-quarter basis, an improvement on the 1.2 percent quarterly growth of the July-September period last year. Each quarter this year has seen improved rent growth from the same quarter last year.
“That 1.6 percent growth is great for the summer season,” says Jay Denton, Axiometrics senior vice president. “The quarterly numbers this year show a stronger apartment market than we anticipated at the start of the year.”
While effective rent growth for the third quarter was lower than the 2.7 percent rate measured in the second quarter, the decrease between the second (2.7 percent) and third quarters (1.6 percent) is typical for the seasons, Denton says. Axiometrics’ historical data shows that the second quarter is usually the best of the year and that rent growth moderates after June.
The 4 percent annualized effective rent growth is the strongest since the 4.2 percent of the second quarter of 2012 and is 70 basis points higher than the 3.3 percent in 2014’s second quarter. The 4 percent mark for the quarter matches what was seen in the monthly trends, when annualized growth reached a 27-month high of 4.1 percent.
“Axiometrics has been calling this the year of the apartment, and the third quarter rent growth further proves it,” Denton says. “The 4 percent growth is big. Nobody was really predicting that the market would re-accelerate this year.”
Apartments Are Full
Rent is still increasing because the market is basically filled to capacity. Axiometrics considers a property or market to be full at 95 percent occupancy, and national occupancy has been at or above that point for the past two quarters. So, new supply is needed to meet the demand. Currently, demand exceeds supply, according to Denton.
“New supply is hitting when the apartment market is already full,” Denton says. “We need units for people to simply have a place to live. Because of that, landlords are not under a lot of pressure to lower rents.”
Demand is strong because more people want to rent. Job growth has been high for most of 2014, Millennials are delaying marriage and children, and a lot of people just don’t want to move out of apartments to purchase homes for reasons including mobility, proximity to work and play and more restrictive mortgage requirements.
Effective Rent Growth: Urban Versus Suburban
One major change seen in the past year is the decreasing rent growth in urban cores and increasing rent growth in suburban submarkets.
“A higher concentration of deliveries is taking place in downtown/uptown/center-city areas, so existing properties are moderating rent to stay competitive and retain residents,” Denton says. “While more total supply is being delivered to suburban markets, those units are more spread out and the competition is not quite as keen.”
In Boston, for example, annualized effective rent growth was 6 percent in the West/Northwest suburban submarket in the third quarter, but -1.1 percent in the Central City/Back Bay/Beacon Hill submarket. In the Denver area, the Aurora-Central-Southwest submarket experienced 13.5 percent annualized growth this quarter, compared with 3.3 percent in the Denver-Downtown submarket.
More supply is coming to both the urban core and the suburbs in the fourth quarter of 2014 and in 2015, but most metropolitan areas will be able to handle the deliveries.
— Staff reports