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Apartment Completions Slow Rent Growth … Except Where They Don’t

Apartment Completions Slow Rent Growth … Except Where They Don’t

Rent growth in the U.S. apartment market has exceeded the expectations of many during 2014, with much of that growth stemming from very strong pricing power in bread-and-butter, middle-market communities. Prices are tending to climb more slowly in the newest, most expensive units, partly reflecting the impact of large volumes of new properties moving through lease-up. Among projects completed during this cycle (since 2010) where initial leases have turned at least once, annual rent growth is running at 1.2%, versus the 3.7% average for all units.

That overall trend, however, certainly doesn’t hold true across all locations. Select metros are posting substantial rent growth in new projects, while a few are registering actual rent cuts at the top of the market.

How do the numbers compare in the country’s 15 new supply leaders?

Denver is the big winner for top-tier product rent growth among the very active construction centers. Rates in the area’s 2010+ completions jumped 3.9% during the year-ending Q3 2014, despite the fact that Denver had to digest roughly 7,200 new units over the course of the past year. While that 3.9% rent growth figure for the newest product is quite a bit below the 9% pricing jump seen for all units, it’s still a great performance.

Other key construction centers realizing new product rent growth that tops the national norm by a meaningful margin include Chicago, Los Angeles, Seattle, and Houston. As of Q3, annual price increases for the 2010+ completions in these locales came in at 2.2% to 2.7%. A couple of these markets will be particularly interesting to watch over the course of the next year or so. Solid pricing power for recent deliveries is just emerging in Los Angeles, so it’s still to be seen whether momentum can be maintained. In an even bigger question mark, Houston is about to add an especially large wave of new supply in 2015, just when plunging energy prices point to the possibility of a dramatic slowdown in new job formation.

Mild rent growth near the U.S. average of 1.2% for the newest communities is occurring across the biggest block of active construction centers, including Charlotte, Boston, New York, Dallas, Austin, San Antonio, and Minneapolis. Fairly similar results appear likely to hold over the near term. (Technically, Charlotte challenged Denver for the lead in rent growth for new properties as of Q3. However, that result clearly was a point-in-time data blip. Prior to Q3, annual rent growth in this top segment of product in Charlotte was running around 1%, and early results for Q4 show pricing power going back to that level of roughly 1%. So, let’s call this one a typical performer.)

Metros where apartment completions moving through lease-up have hurt pricing power meaningfully include Orlando, Raleigh, and Washington, DC. Annual rent cuts near 1% were seen as of Q3 in the 2010+ completions in Orlando and Raleigh. Metro Washington’s loss was the biggest nationally at 3.1% in the top tier of product. However, don’t be surprised if new product in all three of these spots performs notably better in 2015. The pace of deliveries will slow a lot during the next few months in this group of markets, pointing to less pronounced competition for high-income renters.

As a side note, the top rent growth for new product across all markets in the U.S. registers in the Bay Area, with pricing up an average of 6.6% annually as of Q3 in the San Francisco-San Jose-Oakland combo’s 2010+ completions. However, in terms of construction activity, these Bay Area markets really aren’t in the same league as the locales discussed above, so additions really shouldn’t be making much of a difference in top-tier product rent growth. Some 3,500 units were delivered during the past year in San Jose, the most active construction spot in the Bay Area. That’s only about a third of the average completion volume in the nation’s 15 new supply leaders and only about half the volume in the markets that are on the bottom of that active-building list (San Antonio, Chicago, Minneapolis, Orlando, and Charlotte).

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