Demand for apartments surged during the second quarter, gaining momentum after a sluggish performance in the first three months of the year and outstripping new units completed during the quarter.
The occupied apartment count across the nation’s 100 largest metros increased by 127,402 units in the secone quarter, topping 2015’s second quarter demand volume by 23 percent. Demand surpassed second quarter completions totaling 67,550 units, according to MPF Research’s RealPage.
“Any concerns that the market couldn’t handle this year’s increase in apartment deliveries appear unfounded for the moment,” RealPage/MPF chief economist Greg Willett said. “As we’ve hit prime leasing season, the greater product availability — brought by sizable new supply — is revealing bigger product demand capacity. Initial lease-up for most new additions is registering at a very healthy pace, and we’re managing to squeeze a few more residents into an existing stock that’s been essentially full for quite a while.”
Occupancy Returns to Peak Level
U.S. apartment occupancy inched up to 96.2 percent in the second quarter, regaining ground lost in late 2015 and early 2016. Current occupancy matches this economic cycle’s previous peak rate seen in the third quarter 2015 and the highest occupancy rate since the height of the technology boom in 2000 and early 2001.
“Occupancy remains stronger than the norm during past periods of substantial construction,” Willett said. “The fact that few young adults are opting for home purchases right now is helping the occupancy performance. Economic growth is bringing new renters in through the front door. At the same time, the number of existing residents exiting out the back for other housing options is limited.”
Rent Growth Remains Robust
Typical rents for new residents climbed another 1.8 percent during the second quarter, taking the price increase seen over the past 12 months to 4.6 percent per year. Monthly rents for new resident leases now average $1,282.
Influenced by the increased volume of new supply that apartment owners and operators have in the initial leasing stage, average annual rent growth has slowed modestly from this economic cycle’s peak growth of 5.6 percent seen in 3rd quarter 2015. However, today’s annual rent growth pace is still very substantial compared to the long-term historical norm that runs just under 3 percent.
“Annual rent growth in the range of 4 to 5 percent is an unprecedented result six years into a growth cycle,” Willett said.
Annual rent change has been positive for 24 consecutive quarters, with annualized price increases averaging 3.8 percent. By comparison, the mid-2000s growth cycle lasted for 19 quarters and annual rent growth averaged 2.8 percent.
Comparable data on the national homeownership rate for the second quarter of the year is scheduled for release by the Census Bureau on Thursday, July 28. In the first quarter, the homeownership rate of 63.5 percent was 0.2 percentage points lower than the first quarter 2015 rate (63.7 percent) and 0.3 percentage points lower than the fourth quarter 2015 rate (63.80 percent).
Peak Deliveries Lie Just Ahead
A recent slowdown in the number of multifamily housing units authorized by building permits suggests that the apartment construction volume should soon cool slightly. Ongoing construction remains in line with the high levels posted over the past year or two. Properties totaling 534,743 units are under construction in the nation’s 100 largest metros.
“With so much additional product finishing very quickly, the apartment leasing environment could become more competitive in the short-term,” Willett said. “A large block of new supply is scheduled to finish, just as demand registers its routine seasonal slowdown in the winter months. However, barring a pronounced stumble in economic growth, there’s nothing suggesting future stock is going to cause big-picture problems.”