New resident pricing jumps 5.9 percent, while occupancy tightens to 96.1 percent
(September 30, 2015) — The pace of rent growth pace continues to accelerate in U.S. apartments, according to MPF Research, the rental market intelligence division of RealPage, Inc. (NASDAQ: RP). Annual growth in effective rents for new residents reached 5.9 percent in the third quarter 2015. That annual growth included a price increase of 2.2 percent, occurring July through September. The only time annual rent growth for new leases proved stronger was during the Tech Boom expansion of 1999-2000.
Additional Gains in Renewal Lease Pricing
Renewal leases executed in the third quarter were priced 5.4 percent above previous rates. Renewal pricing is important for apartment owners and operators, as more residents are staying put – rather than moving – when their leases expire. In the third quarter, 51.1 percent of households with expiring apartment leases chose to renew. Retention rates have been climbing steadily over the last five years, though they are very seasonal, peaking in the winter months when cold weather discourages moving.
“Sizable rent growth for both new resident leases and renewal leases speaks to the apartment sector’s overall health,” said RealPage chief economist Greg Willett. “Job growth is strong enough to spur meaningful new household formation, and the net demand level for apartments is also helped by the limited number of households leaving the rental market to make first-time home purchases.”
While apartment rents are rising at a significant pace all across the country, the nation’s average price increase is being skewed quite a bit by the surging rents in the western region of the country. Annual new resident rent growth is at 8.4 percent in the West, compared to 4.7 percent in the South, 4.5 percent in the Northeast, and 3.6 percent in the Midwest. Furthermore, the pace of rent growth is now accelerating more quickly in the West than other parts of the country.
|Annual Rent Growth for New Residents by Region
Year Ending in the Third Quarter 2015
|Metro||Current Rent Growth||Year-Ago Rent Growth|
“The more aggressive rent growth rates seen in the West really jump out at you when looking at the list of leaders for metro-level pricing increases,” Willett said. Among the nation’s biggest markets, 14 areas now register annual rent growth of 7 percent or more, and 10 of those 15 are in the western region. Market reports show annual rent growth for new resident leases tops 10 percent in four western region metros – Portland, Oakland, San Francisco, and Denver-Boulder.
|Leaders in Annual Rent Growth for New Residents
Year Ending in the Third Quarter 2015
|12 (tie)||Fort Worth||7.3%|
|14 (tie)||Los Angeles||7.0%|
Tight Occupancy, Strong Demand and Sustained Construction
Sizable rent growth in U.S. apartments reflects tighter occupancy. The occupancy figure as of the third quarter was 96.1 percent, up slightly from 95.8 percent a year earlier.
Demand for apartments across the nation’s 100 largest markets came in at 85,689 units during the third quarter, surpassing concurrent deliveries that totaled 69,299 units. Demand in the 12 months ending in September registered at 260,430 units, ahead of the 236,606 new units completed.
Properties under construction in the 100 largest metros at the end of the third quarter totaled 436,407 units. That construction volume is on par with the average for the past 10 quarters, reflecting no meaningful change in building activity.
“While new supply tends to slow rent growth historically, that hasn’t been the case as of late,” Willett said. “Construction of luxury units in the most desirable neighborhoods results in new product rents that are too high to pull many residents out of the existing stock. Nationally, the typical monthly rent for new communities is around $1,600, more than 15 percent above typical rents in the best properties built prior to 2010.”
MPF Research forecasts that U.S. apartments will remain essentially full through 2016. “While overall occupancy should inch down very slightly, that slight shift really just reflects the volume of product moving through initial lease-up, rather than any real softening in the performances of most individual existing communities,” Willett said.
Rents will likely continue to rise, but at a slower pace than is seen now. “MPF Research expects annual rent growth for new leases to remain above 4 percent through the end of 2016,” Willett said. “Whether or not the western region metros can sustain their torrid price increases is the key question. While underlying fundamentals are very strong in the West, if the economy experiences an unforeseen stumble, there is perhaps greater risk of a price correction there.”
Rent growth and other key performance indicators for the U.S. apartment market are discussed by MPF Research analysts in this video.
For more information on MPF Research, visit www.realpage.com/mpf-research/.
RealPage, Inc. is a leading provider of comprehensive property management software solutions for the multifamily, commercial, single-family and vacation rental housing industries. These solutions help property owners increase efficiency, decrease expenses, enhance the resident experience, and generate more revenue. Using its innovative SaaS platform, RealPage’s on-demand software enables easy system integration and streamlines online property management. Its product line covers the full spectrum of property management, leasing and marketing, asset optimization, and resident services solutions. Founded in 1998 and headquartered in Carrollton, Texas, RealPage currently serves over 11,000 clients worldwide from offices in North America, Europe, and Asia. For more information about the company, visit www.realpage.com.