By Meghan Hall
The national multifamily market continues to benefit from the current, robust economic cycle, with rent growth increasing by two percent in the second quarter of 2019 and 2.6 percent overall this year, according to a mid-year multifamily report recently released by commercial real estate intelligence firm Yardi Matrix. While a slow start in rent growth during the first quarter of the year had experts questioning whether or not the market was showing signs of an impending correction, the second quarter’s surge once again pointed to continued growth for the national multifamily market.
“What surprised me was just how strong rent growth is because we have had a long run of above-average growth, nationally. It would seem logical that rent growth would start to slow down, but it is still strong,” explained Paul Fiorilla, associate director of research at Yardi Matrix. “On a national basis, we are still seeing 3 percent rent growth. This is a sign that demand is very strong and that the number of deliveries is not too much for the market to take in.”
Year-over-year, rent growth has increased to 3.3 percent, up by 40 basis points from May, the report states. While rent growth for the first half of the year has been at a slower pace than when the market was at its peak, the economic fundamentals driving the multifamily market remains strong. The economy has added 172,000 jobs per month this year, less than the 200,000 per month average since the market began recovering in 2010. However, Yardi Matrix states that this growth is still strong, given the late state of the current cycle and considering the national employment rate is below four percent.
Additionally, the number of renting households in the United States reached an all-time high during the first quarter in 2019. During the first quarter, the number of renting households in the United States increased by more than 600,000 to hit 43.8 million in total. There are numerous reasons, stated Fiorilla, that the number of renters has increased over the course of the last market cycle.
“I would have expected that rent growth would have started to cool down a little bit more than it has, but I am not surprised that we haven’t hit a slump. I am very bullish on the future of the multifamily market,” said Fiorilla. “We expect demand to remain strong for several years. Apartment demand is being boosted at both ends of the age spectrum. The 20-34-year-old prime renter age cohort will grow through the middle of the 2020s, while downsizing Baby Boomers show an increasing propensity to rent in cities. Meanwhile, young people are saddled with student debt and have made lifestyle choices – such as urban living, fewer children, getting married later and being less reliant on cars for transportation – that are favorable for renting.”
Despite national growth across the board, there were several metros that far outperformed others, including Las Vegas, Phoenix and Sacramento. The three posted rent growth of 8.4, 8.1 and 5.3 percent year-over-year, respectively, in part due to strong migration and modest increases in supply.
“Las Vegas and Phoenix are high-growth markets; they were hit hard by the recession, and they took a while to recover. But, once things started to improve, they saw growth in population and robust job increases,” stated Fiorilla. “Also, both are relatively inexpensive. For example, the average rent in Las Vegas is still below $1,000. It is a lot easier to raise rent at that level than when it is at $3,000 to $4,000, like in San Francisco.”
Sacramento’s growth, while similar to Las Vegas and Phoenix, is in part due to its sheer proximity to the San Francisco Bay Area, a major gateway market and economic hub.
Fiorilla continued, “Sacramento has also been extremely strong in recent years; between 2014 and 2018 rents went up 40 percent. It was a slow-growth city for a long time, but the economy is diversifying, and people are moving there from the Bay Area to escape high housing costs. Sacramento is inexpensive relative to the largest markets that it is closest to, which has helped boost rent growth.”
In metros such as San Francisco, San Jose and Seattle, posted rent growth just below the national average, between 2.4 and 3.2 percent. According to Fiorilla, slower growth in these markets is to be anticipated.
“Individual metros have their own nuances. In San Francisco and the Bay Area, rent growth has slowed from the extreme heights that we have seen in the middle part of this decade,” said Fiorilla. “Slower growth in metros like San Francisco and San Jose is natural, in part because of just how expensive they are compared to the rest of the country.”
Other cities, such as Houston, have lagged far behind; Yardi Matrix states that the Texas city has seen rent growth of just 0.8 percent, far below the national average. Unlike the San Francisco Bay Area, where this is a dearth of supply, Houston produced 70,000 multifamily units between 2013 and 2018, and the city is still digesting its new housing stock.
For now, though, it appears that the national multifamily market remains strong, even when considering the mature stage of the market and comparing the current market to previous cycles. And, while such a long period of sustained growth has been unusual, the next question for experts is how the multifamily market will fare long term.
“It is an anomaly if you look at historical trends. Multifamily rent growth has exceeded the long-term average—which is somewhere between 2.5% and 2.7%— for most of the last six years,” said Fiorilla. “There are several reasons for that. Coming out of the recession, construction fell precipitously, so we had several years where household formation exceeded the number of housing units being built in the U.S. Demand suddenly spiked when development was down because the recession cancelled a lot of transactions, and banks were stricter with construction lending. Until 2016, when the rate of delivery went back up to more normal levels, we had an imbalance where demand exceeded supply. We’re still working that off, and now the question for the market is how long this will continue.”