Some of the country’s largest metros are seeing rent growth ease in recent quarters, as elevated supply volumes keep operators from pushing prices in a competitive marketplace. The nation’s small markets, however, have not seen comparable levels of development activity, though opportunity certainly exists in some areas.
Here’s a look at three small markets that RealPage analysts discussed as having attractive opportunities for development in the latest RealPage Asset Optimization webcast.
Colorado Springs, CO
Colorado Springs presents an option for near-term opportunity. This metro has seen its population increase by about 70,000 people over the past decade, and the local economy has gained significant ground. In the year-ending 2nd quarter 2018, Colorado Springs added 10,900 jobs, the metro’s strongest employment increase in nearly 20 years. Additionally, the economic base here has grown 25.3% since early 2010, when the current economic cycle began.
Those conditions make for strong demand drivers in the market. Performance has also benefitted from limited multifamily development activity during the current cycle, with the inventory base expanding just 9.3% in the past eight years. In comparison, nearby Denver has seen its apartment base growth 21% in the same time frame. While Colorado Springs saw deliveries get as high as 1,000 units in 2014, annual completions have been more moderate at around 500 units, on average, during the cycle. The historical peak for this metro was in 2002 and 2003, when annual deliveries topped the 1,500-unit mark.
Job growth has triggered solid demand recently, which has easily countered modest supply volumes. Thus, occupancy has remained strong. At 95.4%, 2nd quarter occupancy in Colorado Springs was notably ahead of the metro’s cycle average of 94.8% and not far behind the near-decade high of 96.6% from 3rd quarter 2017.
With such favorable market conditions, annual rent growth in Colorado Springs reached a record high of 10.2% in 3rd quarter 2016. Though growth has eased from that peak in recent quarters, prices are still increasing at a solid clip. Rents climbed 7.8% in the 12 months ending June, among the nation’s best performances. In total, rents are up 43.2% in the current cycle, as of 2nd quarter 2018. Since rent growth didn’t ramp up until later in the cycle, prices here didn’t top the $1,000 mark until 2nd quarter 2017. As of 2nd quarter 2018, average effective rents were at $1,043.
North Port-Sarasota-Bradenton, FL
In the Gulf Coast of Florida, North Port-Sarasota-Bradenton has a proven track record when it comes digesting new supply, helped by a thriving economic base and population growth driven by the market’s popularity as a retirement destination. Employment was up 2.4% in the year-ending June in this market, and the job base has grown a total of 28.7% over the course of the current economic cycle. In comparison, nearby Tampa saw its employment base increase 23% in the past eight years. Annual job growth in North Port-Sarasota-Bradenton peaked in early 2015, when 15,700 jobs were added.
Right about the time when job growth was peaking, apartment deliveries in North Port-Sarasota-Bradenton were just picking up, which came a bit later than the rest of the country. Annual deliveries averaged at just 88 units between 2010 and 2014. Completion volumes picked up to 1,000 units by the beginning of 2015 and has remained in that ballpark since. The pace of deliveries are unlikely to slow soon, with near-term scheduled deliveries expected to increase the existing base by 4.3%.
Apartment demand has been keeping up with supply. As a result, occupancy has registered between roughly 95% and 97% every quarter since early 2011. Most recently, 2nd quarter occupancy registered at 95.7%, a bit ahead of the U.S. average.
North Port-Sarasota-Bradenton started the current cycle with average effective rents of $786. Prices have climbed nearly every quarter since, reaching above the $1,000 mark in 1st quarter 2015 and stretching to $1,173 as of 2nd quarter 2018. Annual rent growth averaged at a notable 5.5% throughout most of the cycle but progress started softening in 3rd quarter 2016. As of 2nd quarter 2018, annual rent growth was at 4.3%, softer than the cycle average but still well above the national average (2.5%).
Another market with near-term development potential is Reno, one of the hottest secondary markets, with strong employment and population growth leading to healthy occupancy and rent positioning. This late-recovery metro logged solid employment growth in the past year, swelling the economic base by a stunning 7.8%, one of the strongest increases in the nation. Anchoring this recent increase in Reno were jobs in casinos and education.
Developers took note of the strong recent momentum and ramped up apartment projects in recent months. While annual new supply remained essentially flat between the end of 2011 through the middle of 2014, deliveries started gaining momentum in 2015 and peaked at over 1,000 units in 2nd quarter 2018, a 15-year high for the market. New additions upped the inventory base by 2.7% during the past year, accounting for a big portion of the 7.3% increase in the cycle overall.
Looking forward, however, scheduled completions are expected to swell the inventory another 7.5% in the coming few years. And while so many completions on the horizon doesn’t close the window of opportunity in Reno, it does pose some downside risk. For this small market to remain a development opportunity, the local economy will need to continue to feed housing demand to allow rent momentum to stay on track. Any disruption to the market’s very aggressive economic growth could have a significant impact to apartment performance, given that so much new product is on the way.
So far, the hot economy has produced notable demand to counter the rising number of completions, leading to a 15-year occupancy peak at 97.3% in 2nd quarter. Occupancy is now up a sizable 610 basis points from the low point Reno hit before the current cycle began.
With strong demand and occupancy levels, operators hiked rental rates by 7.8% during the past year. This was well ahead of Reno’s historical norms and ranked as the #2 year-over-year rent performance in the nation, behind only Midland/Odessa, TX. Average effective rents in Reno are now at $1,084, up 42.8% during the current cycle.
For more discussion on these and other high-performance small markets, view the latest RealPage Asset Optimization webcast, “Sarasota to Reno: 21 Small Market Opportunities.”