The nation’s downtown neighborhoods have generally underperformed their suburban counterparts for rent growth in the past few years. Recently, however, urban core areas have made notable progress, and that performance gap is closing.
Across the country’s 50 largest markets, apartments in downtown locales averaged year-over-year new-lease rent growth of 2.3% in 3rd quarter. This was the fourth consecutive quarter annual rent growth has hovered near the 2% mark, after the pace of increases averaged at only about half that level between late 2016 and fall 2018. While rent growth in the nation’s urban core submarkets is still not fantastic, this recent momentum is encouraging.
Looking further back, annual rent growth in downtown neighborhoods averaged closer to 3% in 2014 and through mid-2016, and was even stronger, at about 5%, throughout much of 2011 through 2013. All this pricing power started to fade, however, as deliveries picked up during the cycle and were heavily focused on the nation’s urban core locales. That downturn didn’t last long, as new supply has been fairly steadily absorbed in most markets, allowing operators to push rents a little more aggressively once again.
Apartment markets with the strongest rent growth in the urban core as of 3rd quarter 2019 were mainly front-runners on the list of overall pricing leaders as well. In fact, among the nation’s top five overall rent growth markets – Phoenix, Las Vegas, Greensboro/Winston-Salem, Raleigh/Durham and Nashville – all saw their urban core submarkets make the top-performers list.
Central Las Vegas led the urban core areas of the nation’s largest markets, with annual rent growth of 7.2%. Price hikes have been strong in the Las Vegas urban core for several years now, averaging near 6.3% since early 2014. This high-performance period followed a time of steep cuts averaging near 4% that took place here throughout 2009 to 2013. Central Las Vegas is also one of a handful of urban core areas where average rents trail the market norm, and developers have passed up this submarket for Las Vega’s more affluent suburbs this cycle. Encouraging solid rent growth in Central Las Vegas more recently, occupancy has climbed a significant 700 basis points (bps) since the end of 2013.
Central Nashville logged rent growth of 6.4% in the past year. This was quite a change for a market that was barely registering any growth at all just a year ago. In fact, Central Nashville logged the nation’s biggest year-over-year upturn in performance among urban cores, with current price hikes running 580 bps ahead of the 0.6% showing from 3rd quarter 2018. Inspiring rent growth, occupancy in Central Nashville also jumped quite a bit recently. As of fall 2019, occupancy climbed ahead of the 95% mark for the first time in three years. Much of this progress is due to apartment annual completion totals pulling back to a five-year low in 3rd quarter. This pullback is significant, given that Central Nashville has driven the market’s new supply volumes in recent years.
Jersey City is the only urban core on the top 10 performance list not located in the South or West region of the U.S. In fact, the Newark market itself is not a notable rent growth performer overall, with prices climbing below the national average at 2.2%. However, the urban core submarket of Jersey City has enjoyed notable annual rent growth near the 4% mark for four consecutive quarters now, which is a reasonable response to occupancy rates that haven’t dipped below the 96% mark since 2011.
While the submarkets that make up the urban core in Seattle – South Lake Union/Queen Anne, Downtown Seattle and the Capitol Hill/Central District area – did not make it onto the list of high-performing locales – all three neighborhoods logged big upturns in rent growth during the past year. South Lake Union/Queen Anne went from rent cuts south of 2% to rent growth of 3.2%, making this one of the nation’s biggest comeback markets. Downtown Seattle was also suffering rent cuts – of 1.8% – in the year-ending 3rd quarter 2018. As of 3rd quarter 2019, prices were up by 1.9%. Capitol Hill/Central District operators were slashing rents by 0.8% just a year ago, and now have turned to price increases of 2.5%.
On the other hand, there are some urban core submarkets where rent change is still lagging. Among the nation’s largest apartment markets, the worst urban core rent performer in 3rd quarter 2019 was Houston’s Downtown/Montrose/River Oaks area, where operators were cutting prices by 2.2%. It’s actually been the norm to cut rents in Houston’s downtown recently, as prices have been sliced by an average of 1.1% in the past five years. In the five years prior to that, however, rents were up by an average of 4.2% annually. The severe downturn in Houston’s urban core came as developers aggressively pursued new projects here, locally based energy companies cut their staffs as oil prices plunged in 2015 and the market overall dealt with the fallout from Hurricane Harvey’s massive flooding in 2017. Demand has returned to Houston’s urban core recently, however, pushing occupancy closer to the 95% mark than it has been in four years and pointing to the possibility of improved rent performance in the near term.
Rent cuts of at least 1% also registered in the heart of Fort Worth and Los Angeles, while there were mild price reductions in Fort Lauderdale’s urban core.
Looking ahead, urban core submarkets face the challenge of digesting even more new supply, even as job production is projected to slow due to a shortage of available workers. Ongoing construction scheduled for the downtown areas of the 50 largest markets weighs in at over 130,000 apartments, virtually unchanged from the volumes of the past four years. Neighborhoods where construction is accelerating the most include Northeast DC, Central Nashville, Austin’s Downtown/University, Houston’s Greenway/Upper Kirby and Central San Jose.
On the other hand, some urban cores are expected to see construction volumes fade, allowing these locales to cope better with slowing job production. Examples of this include Downtown Los Angeles, Seattle’s South Lake Union/Queen Anne, Center City Philadelphia, Intown Fort Worth, Atlanta’s Buckhead area, The Loop in Chicago and Downtown Miami.