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Does a Peek into the Past Provide a Baseline for the Future?

Does a Peek into the Past Provide a Baseline for the Future?

By all accounts, from fundamental metrics to anecdotal offerings, the multifamily market is red hot. As a result, apartment rent growth levels have been on the rise, and surged to 3.7% nationally during the past year. With so much upward momentum, we wondered how much further rent growth levels can grow. As such, we asked two very important questions to gain perspective: How does today’s positive performance rank historically, and will historical precedence shape what we can expect in the future?

To capture the significance of the current rent growth story, you have to consider what was achieved in the past. MPF Research looked at the historical distribution of annual rent growth from 4Q 2004 through 3Q 2014 for 20 of the largest metros. Next, we ranked the most recent annual performance relative to the respective historical distribution. Most recently, for example, the 3.7% national rent growth in the past year landed near the 75th percentile of the past 10 years of performances – meaning that over the course of a decade, the nation’s rent growth has been at or above 3.7% only 25% of the time. At the metro level, rankings varied dramatically. On one hand, Washington, DC’s rent performance in the past year – a 0.1% contraction – landed in the 13th percentile of the metro’s historical performances. On the other hand, the most recent rent growth in Atlanta and Denver were at decade highs

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Recent performance relative to the historical distribution provides a key reference point on where we are in the rent growth cycle. To put this into perspective, let’s look at the percentile rankings of each metro’s rent performances from both 3Q 2014 and 3Q 2013. The two data points in comparison to the historical distribution give us a sense for both historical precedence, as well as recent momentum. At the national level, things picked up, as pent-up demand for apartments provided a boost to the sector. A similar story took shape in Atlanta, Detroit, Denver, Minneapolis, Philadelphia, Phoenix, San Diego and San Jose. However, momentum appears to be leveling off in Boston, Houston, Miami and Orange County. In conclusion, a rent growth forecast is a result of many different variables – including a focus on present day structural themes – but looking into the past certainly provides insight moving forward.

 

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