The U.S. apartment market may be well on its way to record-high occupancies, but new development activity poses risks for its strong markets, according to SNL Real Estate.
Data from Axiometrics shows a May national occupancy rate of 95 percent, the highest monthly rate it has recorded since it began tracking apartment properties in April 2008. The firm has called 2014 a “top recovery year” as the annualized effective growth rate moves upward, recording its strongest rate in May at 3.5 percent — the highest since February 2013.
Second-quarter occupancy figures for multifamily REITs had not been released as of this writing, but the sector delivered a median occupancy rate of 94.8 percent in the first quarter. Over the past three years, the median occupancy rate among multifamily REITs averaged 94.9 percent.
The lowest median quarterly occupancy rate during the past three years was recorded in the fourth quarter of 2011, at 94.3 percent. The highest median quarterly occupancy rate over the three-year period was 95.4 percent, recorded in the second quarter of 2011.
Investor perception of the sector appears to be strong. The SNL U.S. REIT Multifamily index posted the highest total return year-to-date through July 9 among all SNL U.S. REIT sector indexes, at 25.42 percent, followed by the SNL U.S. REIT Residential and the SNL U.S. REIT Manufactured Homes indexes at 23.18 percent and 22.78 percent, respectively. The multifamily sector outperformed the broader U.S. REIT sector by 9.03 percentage points.
While occupancy rates among multifamily REITs are arguably stable, Reis Inc. senior economist Ryan Severino recently told SNL that, although demand will remain high, new apartment supply will likely overwhelm it if current trends persist. He noted that rent growth is already moderating in some markets. Reis expects markets such as the San Francisco Bay Area and Seattle to see the effects of oversupply on rents in the near term.
“The markets that started to recover the soonest, at least enough of them, are the ones where we're seeing a lot of the construction activity taking place right now,” said Severino. “We're not seeing a lot of the construction activity in some of the secondary markets, where they're kind of the laggards right now. So they probably have some time for rents to accelerate there, whereas in a lot of the major markets with supply booms, you'll probably see some deceleration in rent growth.”
Severino's comments follow a report in late June by analysts at Cantor Fitzgerald that the West Coast's apartment markets are expected to weaken despite the region's relative strength, as capital moves into these strong markets in the form of supply. These tendencies, though, are typical of the apartment rental cycle.
“If you look at real estate supply over time, it's the early movers that are well rewarded, and it's the late movers that are taking the most risk,” Cantor analyst David Toti told SNL in an interview following release of the report.
The West Coast market has established dominance in the U.S. apartment REIT sector, with California topping the list of states where REITs have multifamily exposure. There are six U.S. multifamily REITs with exposure in California, Washington and Oregon, led by the three largest publicly traded U.S. multifamily REITs in terms of market capitalization. These six REITs delivered strong same-store fundamentals in the first quarter.
Multifamily REITs reported 41,471 units under development as of July 9, with California remaining the top market, with 14,156 units under development.
Upon closer examination, multifamily REITs reported a total of $9.3 billion in projected development costs in the first quarter, an increase from about $8.7 billion for full-year 2013.
AvalonBay Communities Inc. tops multifamily REITs in terms of development, with 11,963 units as of July 9, mostly in California (3,711), Massachusetts (2,587) and New York (2,007), respectively.
— Staff reports