The multifamily sector’s story in 2015 will invert the rent-growth scenario seen earlier in the cycle, says apartment data firm Pierce-Eislen. While rents grew faster for class A “renter by choice” properties a few years ago, this year it will be class B and C properties favored by “renters by necessity” that will have the edge.
The reason, according to Pierce-Eislen, a Yardi Systems company, is the advent of new supply. Although the tally for this year is still projected to come in below the long-term average of 300,000 units, it will affect a handful of submarkets more deeply, and the upper end of the market in particular. Accordingly, class A’s projected rent growth of 4.5% comes in below the predicted 5.1% for B and C properties.
“Following 2014’s estimated rent growth of 5.9%, this is still quite positive given the expected 2015 delivery of 296,848 units, up from 209,133 units in 2014 and 138,582 units in 2013,” the report states. And even with a decelerated pace of rent growth this year, it’s still ahead of other recent years: Pierce-Eislen notes that rents grew by an average of 3.7% in 2012 and 4.3% in ‘13.
The best performers in terms of rent growth among lifestyle properties are predicted to be “technology-heavy Western markets with restrained supply growth,” such as Denver, San Francisco and Seattle, all of which are projected to top 7% year-over-year rent growth in class A. The report notes that Atlanta, where rent growth started later than in other cities, is poised for “another strong year.”
Conversely, Pierce-Eislen reports that in markets with a strong concentration of energy sector employers, such as Houston and the aforementioned Denver, the pace of employment and rental demand will be slowed due to oil’s sub-$60 per-barrel price. However, the firm says, “the benefits to the rest of the US economy and to consumers’ disposable income outweigh those dislocations and leave us more confident for 2015.”
On a macroeconomic basis, the report cites predictions that payrolls will reach 144 million and unemployment will dip below 5% by year’s end. “The significance of this is clear for the apartment industry, which thrives on growth,” according to the report.
On a regional basis, the report sees employment centers growing “not only in the traditional banking centers of the Southeast, but also in the emerging energy corridors. These new areas, mostly related to shale oil production, are located in the central United States and Canada and affect many surrounding areas.”
Meanwhile, the traditional coastal and Sun Belt markets will see “modest pricing power” along with increased NOI, along with “some challenges in expenses,” which will keep actual rent increases in the middle and upper single digits. “The vast majority of markets will track inflation,” according to Price-Eislen.
Markets such as the Midwest have generally been the last to recover and consequently will see growth based on “a wide variety of factors,” the report states. “Previously announced plant relocations, new plant openings and general industrial services will help many markets well served by rail, highway and the prospects of the Panama Canal expansion scheduled to open in the next five years. Although the report sees the greatest overall likelihood of economic growth in the South and Southeast, “economic opportunity in value-add, one-off, mixed-use, and core-plus assets will likely occur in many other corridors.”