U.S. apartment rental rates jumped 6.5% in May 2015 – breaking the previous high for this cycle set just one month earlier. Momentum was seen in rents for both new residents and for renewing renters, up 8.4% on new leases and 5.1% on renewals.
The May numbers mark three straight months of better-than-expected rent growth to start 2015’s peak leasing season. The results have been especially impressive given widespread industry expectations of slowed rent growth in 2015 due to increased new supply and affordability barriers, among other factors.
The rent growth numbers are based on lease-over-lease change. In other words, leases in May 2015 were signed at rates 6.6% higher, on average, than the previous rents for the exact same units. Lease-over-lease movement is the truest measure of rent growth – capturing signed leases for both new residents and renewing renters on a same-store set of units. Traditional survey methods provide insight only into asking rents (inclusive of concessions) for new leases, regardless of whether anyone signed a lease at those prices.
The statistics come directly from a subset of the nearly 10 million units available to MPF Research, as a division of the RealPage platform.
New lease rent trade-out is highly seasonal (compared to steadier trends in asking rents and in renewal rents). April and May are important months, being the start of the peak leasing season with more leases in play. Most property managers strategically schedule the bulk of their leases to expire in spring and summer months, when demand is strongest. Expirations tend to be highest from July to August, so these next three months will provide an even bigger test.
Lease-over-lease rent growth is an early indicator of revenue trends for apartment operators and owners. An impressive start to the peak leasing season could point to another big year for the U.S. apartment industry – counter to mainstream expectations of slowing momentum. Surveys of industry executives from leading trade groups like the Urban Land Institute (ULI) and the Pension Real Estate Association (PREA) indicated a widespread view that the apartment sector’s growth pace would diminish in 2015. The same view was held going into 2014, only to see rent growth exceed expectations.
Among the nation’s 50 largest metros, the largest rent hikes continue to come in markets that generally fall into one of two categories: high-demand, high-supply markets that continue to thrive and late-recovering markets starting to rebound from prolonged struggles. The biggest rent growth remains in the West region – which claimed the top seven spots and eight of the top 10. Oakland ranked #1 for both growth in both new leases and renewals, making the East Bay the national leader for total rent growth at 14.1%.
The total rent growth numbers are weighted by the number of signed leases. That’s why, for example, Detroit ranked above Riverside/San Bernardino even though the latter posted higher numbers for both new leases and renewals. Because new leases, which tend to be more valuable, comprised a larger share of the leases signed in May, Detroit ranked ahead of Riverside/San Bernardino for total rent growth.
The results to date continue to show the impressive depth of demand for apartments, even with rising rents and record levels of new supply in markets all across the country. Neither headwind has proven to be as formidable as anticipated. As additional proof: Apartment resident turnover remains low.
Renewal retention rates, the share of expiring leases being renewed, in May came in at 51.2%, up 40 bps year-over-year – marking the 25th consecutive month with year-over-year growth in retention. And average occupancy for stabilized properties (which excludes lease-ups) tightened to 95.7%, both sourced from RealPage’s lease transaction insight. Both data points, combined with the rent growth numbers, show that stabilized properties are still not losing a substantial number of renters to the large number of new apartments in lease-up.
Of note, the U.S. statistics are based on a same-store set of apartments between May 2010 and May 2015, extracted from RealPage software. The metro-level rankings are based on a same-store set of properties over the last year.
Apartments in the dataset are professionally managed and tend to be of institutional quality. The West and South regions, where the apartment stocks are more reflective of institutional quality product, comprise larger shares of the dataset than the Northeast and Midwest.
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