Apartment rental rates are declining so much in several of the nation’s hottest major real estate markets that the national annual effective rent growth rate fell to 3.1 percent in July, which recorded the lowest rate since 2.8 percent in July 2014, according to the latest report from Axiometrics.

Leading the declines were:

• Houston, whose -2.2% annual effective rent growth in July marked the fourth straight month the metro was below zero.
• San Francisco, where apartments fell 1.21 percentage points to -0.7%, the first time the market was negative since April 2010.
• New York, which posted a -0.2% annual effective rent growth in July, the first time it was in negative territory since January 2014.

In San Jose and Philadelphia rates were still positive in July, but with 0.3% and 0.4% rent growth, respectively, a dip below zero is possible.

“Lower rates of job growth and an abundance of new supply have been causing decreased apartment performance in metros like the Bay Area, New York, Houston and Philadelphia,” said Jay Denton, senior vice president of analytics for Axiometrics. “The pace of construction does seem like it will subside in most areas in 2017, but relief from new deliveries will not truly be felt until 2018.”

	July 2016	June 2016	July 2015
National
Average Rent	$1,291	$1,292	$1,252
Annual Effective Rent Growth	3.1%	3.5%	5.2%
Occupancy	95.1%	95.2%	95.2%

Dodge Data & Analytics Construction Pipeline Staying Elevated

According to Fannie Mae’s July 2016 Multifamily Market Commentary, the Dodge Data & Analytics Construction Pipeline is showing an exceptional level of new apartment rental units currently underway. More than 556,000 units were under construction as of June 2016 – up from 512,000 in January 2016. And after declining steadily over the past several years, the number of condo units underway has begun to increase relative to the prior year – rising to 72,000 units in June, up from 69,000 six months earlier.

Multifamily housing was up 5 percent to a seasonally adjusted annual rate of 441,000 units in July while single-family production edged up 0.5 percent to 770,000 units.

The most active metros in the country for apartment development continue to be New York, Washington, Houston, and Dallas. New York has more than 100,000 units underway, while the other three exceed 30,000. Denver, Seattle, and Boston follow with slightly fewer units underway. Rounding out the top ten are Los Angeles, Austin, and Atlanta.

An onslaught of new supply is coming online as a combination of low oil prices and a weaker than expected local economy are decreasing demand for rentals at the same time as deliveries of new units are surging. This suggests that the metro is in for a period of rising vacancies, declining rent growth, and even possible rent contractions. The longer-term outlook should brighten, however, once these conditions subside and Houston’s multifamily market returns to a healthy growth mode.

In Austin, the vast majority of its new stock is for Millennial high-tech workers who want to live downtown. But some of the new jobs the local economy generates in the next few years may not be in the high-tech sector and may not pay enough to support Austin’s escalating asking rent levels. As a result, its apartment market is expected to see some volatility, and a decline in occupancy levels and rents – especially if there is a slowdown or disruption in the high-tech sector. Though July was the ninth month of the last 10 that national annual effective rent growth has decreased, Axiometrics expects the market to stabilize by the end of 2016, when rent growth is forecasted to be 3.2%. Rent growth remains above the long-term (1997-2015) average of 2.2%.

West, South Continue Metro Dominance

The West and the South regions have housed the apartment markets with the highest annual effective rent growth for quite some time. That’s still the case, as 16 of the top 17 rent-growth metros among Axiometrics’ top 50 for July are located south of Interstate 40, west of Interstate 15 — or both.

Annual Effective Rent Growth           Occupancy Rate          Revenue Growth

Rank    MSA   Jul-15  Jul-16  Jul-15  Jul-16  Jul-15  Jul-16

1          Sacramento, CA          10.0%  12.2%  95.7%  96.0%  10.2%  12.5%

2          Riverside, CA 7.2%    7.1%    95.1%  95.6%  7.3%    7.6%

3          Seattle, WA    7.7%    7.0%    96.0%  95.9%  7.5%    6.9%

4          Phoenix, AZ    7.0%    6.8%    94.3%  94.4%  7.9%    6.9%

5          Salt Lake City, UT      5.1%    6.3%    96.0%  95.9%  5.3%    6.1%

6          Las Vegas, NV            7.2%    6.1%    94.0%  94.5%  7.9%    6.7%

7          Tampa, FL      6.2%    6.0%    95.6%  95.4%  6.9%    5.9%

8          Nashville, TN 6.9%    6.0%    96.2%  96.1%  7.0%    5.8%

9          Fort Worth, TX           7.0%    5.9%    95.8%  95.7%  7.7%    5.8%

10        Atlanta, GA     7.2%    5.7%    94.7%  94.6%  7.7%    5.6%

11        Orlando, FL    7.0%    5.6%    95.7%  95.9%  7.7%    5.7%

12        San Diego, CA            7.4%    5.4%    95.2%  96.0%  6.3%    6.2%

13        Charleston, SC            5.0%    5.2%    95.2%  95.1%  4.3%    5.1%

14        Dallas, TX       6.3%    5.1%    95.5%  95.5%  7.0%    5.1%

15        Anaheim, CA  5.1%    5.1%    95.6%  95.9%  4.4%    5.4%

16        Warren, MI     3.6%    4.5%    95.8%  97.1%  3.3%    5.8%

17        Charlotte, NC  5.9%    4.4%    95.5%  95.7%  6.2%    4.5%

National          5.2%    3.1%    95.2%  95.1%  5.4%    3.0%

Selected Other Markets

2          Reno, NV        8.4%    11.4%  96.7%  96.9%  9.0%    11.7%

3          Colorado Springs, CO 4.5%    11.0%  94.6%  95.3%  3.3%    11.6%

4          Salinas, CA     8.5%    10.0%  98.0%  97.1%  8.9%    9.1%

5          Tacoma, WA  7.5%    9.3%    96.2%  97.0%  8.8%    10.1%

6          Greenville, NC            0.8%    7.5%    92.4%  93.3%  -2.6%  8.3%

*Rank is based on annual effective rent growth in July 2016 for Axiometrics’ Top 50 Markets. Selected other markets are based on Axiometrics’ Top 120 Markets. Axio tracks properties in more than 500 MSAs throughout the country.

Source: Axiometrics