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First Quarter Performance Shows US Apartment Market Coming Back to Earth

Rent Growth Expected to Moderate as Home Ownership Ticks Up
May 14, 2018
Pictured: Camden North Quarter in Orlando. The 333-unit property sold to Camden Property Trust in February for $80.75 million. Orlando has the highest forecast rent growth in the country, according to CoStar.

The high-flying apartment sector, which led all other property types in the economic recovery and became the darling of investors, is coming back to earth.

CoStar’s first quarter multifamily review and forecast predicts apartment rents will still increase but at a much slower pace and, in some markets, occupancy rates for multifamily properties will stall.

One factor in the moderating demand for apartments has been a change in homeownership rates. During the current economic expansion, a decline in homeownership resulted in a growing pool of renters, even as household formation remained strong. But that trends seems to be over now. Homeownership rates, although still historically low, are ticking back up, taking hundreds of thousands of current renters out of the apartment market.

It remains to be seen what effect rising interest rates may have on homeownership rates.

CoStar Group’s first quarter report details the decelerating fundamentals in what has been the star of commercial real estate. The group’s webinar is available in the Knowledge Center at

"The cycle is long in the tooth at this point," said John Affleck, research strategist for apartments at CoStar. "And the likelihood of a recession in the next few years is a growing possibility. This cycle has been one of the longest in history."

Should a recession hit, the apartment market is likely to have a soft landing, according to CoStar's analysis. New construction is set to taper off in the next year, and home ownership is unlikely to return to the pre-recession high of 69 percent of households, leaving a large number of potential renters.

But for multifamily investors and developers, the days of being able to underwrite most properties at 4 percent or 5 percent annual rent growth are likely over. Nationwide, year-over-year rent growth averaged 2.5 percent over the past 12 months ended in March 2018. That growth rate could flatten to as little as 1 percent by 2020.

Several major markets that have added thousands of new units, including Dallas, San Francisco, Chicago, Washington DC and New York, all saw year-over-year rent growth of less than 2 percent in first quarter, according to CoStar research.

And CoStar forecasts that many big markets will see annual rents increase little by year-end. San Francisco’s rents are projected to grow an average of only .8 percent by year-end. Chicago (.7 percent); Washington, D.C. (.7 percent); and New York (.7 percent) should also annual growth of less than 1 percent.

On the flip side, Orlando, with a 6.8 percent average rent increase in the last 12 months, is the leading apartment market for rent increases. Las Vegas (5.8 percent); Sacramento (5.5 percent); Jacksonville (4.9 percent) and the Inland Empire (4.8 percent) round out the top-five markets for rent growth.

But investors still seem to have faith. Sales of multifamily properties were up 10 percent year-over-year in the first quarter, according Lee Everett, senior managing consultant for CoStar Portfolio Strategy. And looking forward, Everett forecasts that rents for mid-quality 3-Star and workforce housing properties are expected to increase and a larger percentage than the top-end 4 and 5-Star rentals. That should attract investor attention.

John Doherty, Multifamily Reporter  CoStar Group   

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