While most apartment market observers – including the MPF Research team of analysts – anticipated that U.S. occupancy would backtrack a bit as deliveries accelerated during 2014, so far there’s been an encouraging move in the opposite direction. The 2Q occupancy number for the top 100 metros across the country came in at 95.6%, up a hair from mid-2013’s reading of 95.3%.
The biggest part of the story behind why occupancy hasn’t declined is the better-than-anticipated performances of the brand new units coming on stream. In many cases they’re leasing as quickly as they can be delivered, so they aren’t proving as big a drag on overall occupancy as is typically the case when lots of product is moving through initial lease-up.
But fast lease-up at brand new completions doesn’t explain the actual occupancy bump. For that story, you have to dig into rising occupancy at existing – primarily middle-market – inventory. Most of the increase in occupancy within that product segment has come in just a handful of metros, as those middle-market units already have been basically full for quite a while in the vast majority of locations. Here are the 10 metros that really drove the nation’s jump in apartment occupancy during the past year: Atlanta, Cleveland, Fort Lauderdale, Houston, Jacksonville, Las Vegas, Riverside, Sacramento, St. Louis, and West Palm Beach.
Progress in occupancy made during the past year has virtually exhausted the available existing product in five of these metros, so don’t expect them to fuel any further rise in occupancy moving forward. Those areas are Cleveland, Fort Lauderdale, Riverside, Sacramento, and West Palm Beach.
On the other hand, if (as is expected) job growth stimulates enough household formation to continue to generate significant apartment demand, occupancy in the existing product base can improve to a meaningful degree over the near term in Atlanta, Jacksonville, Las Vegas, and St. Louis.
Houston is the wild card in the bunch. Technically, there’s room in the existing apartment base for occupancy to climb some more. But overall occupancy already is way above the historical norm, and the remaining vacancies are concentrated in really undesirable, obsolete units. Thus, it’s not clear whether those available existing units will be absorbed or whether the middle-income households that will be added in the metro will tend to seek out some other housing option such as rental single-family homes.
Looking beyond the metros that have contributed to the country’s occupancy increase in the past year, there are five more big markets that do have the potential for notable occupancy bumps in existing product, if all the pieces of the economic puzzle come together in exactly the right way. These additional spots with meaningful availability of existing units are Indianapolis, Memphis, Phoenix, San Antonio, and Virginia Beach. They definitely are ones to watch.
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