For the U.S. apartment market, rent performance reached a cycle peak of 5.2% in 2015. Since then, performances have moderated to around half that level. Driving that moderation has been compression in performances among major markets.
Apartment performance in 2015, while very strong, was also volatile in terms of market-level performance. Though many market performances were clustered in the 4% to 6% range, the spread in terms of leaders and laggards had a range of roughly 13 percentage points. Back then, West region markets like Portland, Denver, Oakland, San Francisco and San Jose were in the spotlight with annual rent growth in the 11% to 13% range. Among the top 10 markets for annual rent growth, performances ranged from roughly 7% to 13%. Meanwhile, performances in Memphis, Virginia Beach and supply-laden Washington, DC saw minimal rent growth of roughly 1% or less.
Fast forward to 2018, increases dropped to around 3% or less among Portland, Denver, Oakland, San Francisco and San Jose. Those former leaders have been replaced by generally late-cycle recovery markets like Orlando, Las Vegas, Sacramento and Jacksonville, whose performances ranged from 5.2% to 6.7%. Rent growth among the top 10 markets were tightly clustered in the 4% to 6% range. Meanwhile, most market-level performances are clustered around 2% to 3%, and 12 markets posted rent growth around 1% or less. The overall performance spread has narrowed to less than 7 points.
What do narrowing rent performances mean for owners and operators? As premiums for the right local market selection erode, individual property stories become increasingly important when making investment and development decisions. And on the operations side, expertise becomes more important to achieve total return.
With higher prices and lower liquidity, income returns are becoming more important as capital appreciation slows. According to NCREIF, annualized capital returns have been about 2% or less over the past five quarters. Meanwhile, returns on the income side have been about 4.4%, while simultaneously have much lower volatility. Most recently, NCREIF reported total returns for apartments of 6.2% in the year-ending 1st quarter, about two-thirds of which was realized on the income side. This is an indication that income returns are the clear value driver.