Jay Denton is VP of Research at Axiometrics, Inc., a leading provider of apartment data and apartment market research. Jay leads the company’s analytics team and is responsible for managing Axiometrics’ entire research operation. He has been a featured expert in multiple industry and business publications, including Multifamily Executive, Multi-housing News, BusinessWeek, and Barron’s. Our interview of Jay, below, provides valuable insights into the latest rental market trends.
Please tell us about Axiometrics.
Axiometrics has established itself as the leading provider of apartment data and apartment market research. We track asking rent, concessions, and effective rent at the floor plan level as well as occupancy at the property level every month. We track properties from the early planning stage through construction and lease-up to stabilization in over 400 MSAs. We also offer the Axiometrics Student Housing Solution which provides coverage on over 3800 student and student competitive properties.
What are you predications for the rental market in 2014 and into 2015? How do you see rents fluctuating?
As supply and demand come back into balance, we see most markets moderating closer to the long-term average growth rate for effective rents. On a national basis, annual effective rent growth has averaged 2.1% since we began tracking the apartment market in 1995. The peak during this cycle was 5.3% in July 2011, and growth rates have been moderating since then. The current annual rent growth rate is 3.5%. We expect that rate to steadily slow to 3.0% for 2014 and 2.4% for 2015. The growth for each Metropolitan Statistical Area (MSA) can vary from the national average depending on the strength of job growth and the amount of new supply delivered into the market.
What are the strongest markets of 2013, and why?
While the national annual rent growth rate is very solid, there are five areas within the country that are boosting the overall numbers. MSAs in Texas, Colorado, Northern California, the Pacific Northwest, and Florida represent 18 of the top 25 markets for rent growth right now.
Top-performing MSAs and annual effective rent growth for June 2013:
- Texas – Austin (5.1%), Corpus Christi (8.7%), Dallas (4.1%), and Houston (6.1%)
- Colorado – Boulder (9.6%) and Denver (7.4%)
- Northern California – Oakland (10.9%), San Francisco (7.5%), and San Jose (6.6%)
- Pacific Northwest – Portland (6.5%) and Seattle (7.5%)
- Florida – Cape Coral (10.0%), Jacksonville (4.2%), Miami (4.6), Naples (7.8%), North Port (6.8%), Palm Bay (6.2%), and Tampa (4.2%)
Putting Florida aside, the other areas have benefited from better than average job growth. In particular, the latest BLS data shows the Texas MSAs with annual job growth rates greater than 3.0%. The national average is 1.7%. Boulder, Denver, and Seattle have a job growth rate between 2.4% and 2.9%. Job growth in Northern California has slipped according to the latest numbers, but it had been robust for most of the last year. Northern California is an area of the country where a greater share of the jobs will go towards occupying rental housing.
The Florida MSAs suffered some of the nation’s largest declines in effective rents before and during the recession. While MSAs throughout the country benefited from very little new supply delivered the last three years, it has been even more muted in most of the Florida MSAs. Job growth has not come back in full force, but we are seeing a revival in apartment performance nonetheless. The occupancy rate in Naples has improved from 93% two years ago to 98% today. The better occupancy rates, coupled with lack of new supply, are resulting in pricing power in these MSAs. Remember, the Florida markets also benefit from relocation of retirees that do not show up in the job growth numbers.
What are your predictions for the strongest rental markets in 2014, and why?
Several of today’s top MSAs will likely remain in the upper tier for rent growth next year. In particular, we see Northern California remaining a top performer, but growth rates will likely moderate closer to 4.5%-5.0%. The Texas markets will remain stronger than the long-term average, but growth will likely edge closer to 3.5% as new supply comes back into balance with job growth.
MSAs with potential to move up in the rankings would be Phoenix, Atlanta, and Los Angeles. The pace of new deliveries will increase in Phoenix and Atlanta next year, but they will remain well below the long-term average for new deliveries. Both MSAs have solid absolute and relative job growth compared to the rest of the country. Currently, Atlanta and Phoenix both rank in the top eight for number of jobs created over the pat year, and both have a relative job growth rate close to 2.5%. The concern for those two MSAs is how a recovering single-family market impacts the apartment industry.
Los Angeles, along with the rest of Southern California, has lagged during the recovery period. As many other markets across the country will continue to decelerate in 2014, Southern California is area that is likely to be stable and perhaps even improve from its current position. Job growth has recently slowed in that region, but it is forecasted to improve next year.
How has the market changed in the past 10 years?
The ability and desire for an apartment resident to purchase a single-family home is tremendously different from a decade ago. In terms of ability, renters today are faced with much tighter lending standards to purchase a single-family home. On top of that, young professionals are saddled with college debt making it difficult to obtain or afford a new home loan.
Even if they have the ability to purchase a single-family home, the desire has been negatively impacted in multiple ways. A decade ago, we were all under the impression housing prices would increase into perpetuity and interest rates would never be below 6% again. Buy as soon as you can because it will never be this cheap again! We all know how that perception changed as the housing boom turned into a bust. At some point, people forget about the past, but much of the negativity from the housing collapse fallout still lingers today.
The difference in willingness to purchase a home doesn’t stop there. Lifestyle changes that trigger the desire for a single-family home, such as marriage and first childbirth, have been pushed back to allow time to build a career. Speaking of careers, the ability to move to a better labor market became even more important during and after the Great Recession. That is difficult to do when you are tied down to a non-liquid asset like a single-family home.
With all of that said, owning a house is still the American Dream. As the home ownership rate edges closer to a trough, close to two-thirds of our country still resides in owner-occupied housing. Our prediction is for the home-ownership rate to begin to increase once again, perhaps as early as the end of this year. Even as it increases, apartment performance will remain healthy because of the rising population in the key age demographic for apartment demand. Whether you call them Generation Y, Echo Boomers, or Millennials, this wave of youngsters will continue to hit the market over the next several years. Even if a larger percentage of them begin to own a house, there will be plenty leftover for a healthy apartment market for years to come.
In summation, the key population demographic for apartment rentals is growing, and they are remaining in rental housing longer than in the past.
What are some of the worst things a property manager can do when renting their units?
Not taking the time to fully vet your prospective resident. You may feel like you absolute have to move the vacant unit as soon as possible, but letting the wrong people into your building can burn you and disrupt the lives of surrounding residents.
What advice would you give to a new multi-family property manager?
Be an expert about your property and your competitive area. Know not only your strengths and weaknesses, but those of your competitors as well.