MPF Research’s latest live, interactive webcast highlighted key themes for the U.S. apartment market in 3rd quarter 2016, results from a new study of investment returns for suburban and urban assets and the latest on the multifamily capital markets.
The half-hour event was hosted by RealPage Chief Economist Greg Willett, MPF Research Vice President Jay Parsons and featured special guest Doug Bibby, president of the National Multifamily Housing Council.
The initial conversation unfolded around rent growth for new leases, which measured 4.1% year-over-year in 3rd quarter 2016. That was down from the current cycle’s peak of 5.6% a year ago. Does the slowdown reflect that the apartment market is cooling off?
“I don’t think that’s an accurate characterization,” Willett said. “Rents are still growing at an historically strong pace, just not quite to the degree seen last year.”
Parsons echoed that sentiment, noting that RealPage lease-transaction data showed that lease-over-lease rent growth was higher, at 4.8%, in August.
“That means if I moved out of a unit and you moved into the same unit, you paid 4.8% more than I did for the same unit,” Parsons said. “Renewals, though, were up 4.9%, and that’s on par with last year, meaning that if I renewed my lease, I paid a 4.9% bump to do so. So overall combined rate change came in at 4.9% – still a great number.”
Renewals, outside of individual portfolios, aren’t typically tracked in the multifamily industry. The data absence, Willett said, makes it easy to forget renewals comprise half of the rent roll and are critical to revenue performance.
“And right now, we’re seeing strong momentum in renewal pricing in large part because renters continue to renew their leases. Willett said.
In August, 52.5% of expiring leases renewed. Renewals aren’t the only metric sustaining impressive performance. National occupancy is also on the rise.
In 3rd quarter 2016, U.S. apartment occupancy landed at 96.5%, up 30 basis points year-over-year. That rate was a 16-year high – surprising momentum given large supply numbers. More than 261,000 units completed in the year-ending 3rd quarter 2016.
That completion volume is “around the highest levels since the 1980s, and that doesn’t even include the huge number of projects doing a lot of pre-leasing right now,” Willett said.
According to MPF Research preliminary data, about 110,000 units were absorbed in the 3rd quarter. If that number holds up, Willett said, it would be the strongest 3rd quarter seen in the present cycle. In the last 12 months, the nation has absorbed more than 276,000 units – more units than what completed.
Across the nation, 555,000 units are currently under construction. Parsons calculated 367,000 of those are set to complete in the next 12 months.
“The good news is permit volumes appear to be tailing off a bit because lenders are getting nervous about construction loans,” Parsons said. “So it appears we’ll hit peak supply levels in 2017.”
Much of the new construction is concentrated in urban core areas, where the return on investment is perceived to be greatest. But a new study by MPF Research casts doubt on that long-held belief that downtown-area assets produce the greatest investment returns.
“No group got hit harder in the last recession than” central business districts, or CBDs, Willett said. “And while they also bounced back fast, they’ve since trailed off a little bit – and have lagged behind top-tier suburbs for the past three years.”
Top-tier suburbs in high job-growth metros, the study found, produced the greatest risk-adjusted returns – not only in the past three years, but also over the past five-, 10- and 15-year periods. The study found that property appreciation in those suburban areas essentially matched CBDs. The difference maker was income growth, which was highest in the top-tier suburbs.
Regardless of investment strategy, apartments continue to be the favored asset class for investors, according to Real Capital Analytics data.
“Year-to-date, it’s the only asset class where sales volumes exceed the pace set through the first eight months of 2015,” Willett said.
Meanwhile, cap rates across all property types continue to compress, and apartments are no exception. As of August 2016, the average cap rate for apartments registered at 5.61%, according to Real Capital Analytics.
“That’s a record low, but of course the spread over the 10-year treasury remains very attractive,” Parsons said. “The real risk, of course, is interest rate growth, but that’s the risk for pretty much all investments these days, and most economists are expecting only marginal increases in interest rates.”
Q&A With Doug Bibby
In a Q&A session, NMHC’s president, Bibby, joined the conversation to talk key policy issues affecting the industry today. An area of concern remains discourse around apartment affordability. The general dialogue, Bibby said, fails to make important distinctions between apartment affordability and affordable housing.
“It’s important to understand the difference between market-rate and truly affordable housing,” Bibby said.
MPF Research has found through analysis of RealPage lease-transaction data that renters of market-rate apartments spend roughly 20% of their income on rent. Figures from the industry’s largest apartment Real Estate Investment Trusts reflect similar trends.
The oft-discussed affordability crisis lies with designated affordable housing, not market-rate apartments, Bibby said. Designated affordable housing, which is government subsidized, is restricted to low-income households.
However, affordable housing is in extremely short supply. Bibby called for more funding for affordable housing. Annually, subsidies such as the Low Income Housing Tax Credit total $7 billion, “essentially a rounding error” in the more than $3.7 trillion federal budget, Bibby said.
Bibby also discussed plans for the recently announced NMHC Research Foundation. RealPage is a flagship member of the foundation. In the partnership, RealPage will contribute $1 million and provide data and access to the MPF Research analytics team.
For deeper insight into these topics, and to watch the full Q&A session with Bibby, register and view the webcast.