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The U.S. multifamily market continued to be boosted by the strong national economy during Q3 2016, as the job market posted steady gains and home prices approached pre-recession levels, although uncertainty remained around interest rates and added supply.
Rent Growth
According to Reis, the average asking rent reached $1,272/unit, a 3.9% increase over the $1,224/unit average one year ago, and has risen in every quarter since Q1 2010. The Class A average was $1,473/unit, up 3.8% year-over-year, while Class B/C properties increased 3.4% to $1,030/unit. Among primary markets, New York City posted the highest rent nationally, at $3,499/unit, followed by San Francisco, at $2,548/unit. Overall, Reis forecasts rents to grow 3.7% during 2016, and slow to 2.3% by 2020.
The strongest performing multifamily market in the U.S. over the last 12 months was Seattle, where average asking rent increased 9.3%, climbing to $1,491/unit, from $1,364/unit. Driven by a strong local economy—with a broad industry base featuring aerospace, high-tech, and e-commerce—rents have increased in every quarter since 2009 in the market.
Portland posted the second largest increase in the nation, boosted by high-tech job growth, including renewable energy business and tech start-ups. The area’s strong local economy built on port distribution, strong tourism, and affordability compared to the Bay Area, should help Portland remain a strong performer in the long run.
One of the fastest movers year-to-date has been Atlanta, where asking rents increased 7.2%, to $1,067/unit from $995/unit. The market moved to #3 from #15 at the end of 2015. Atlanta has shown signs of its pre-recession past, with a strong housing market and inward-migration amid steady job growth.
Markets in the Bay Area have slipped. At the end of the third quarter, San Francisco came in at #75 out of 75 markets, with a 0.5% increase (the market was ranked #2 at the end of 2015) and Oakland-East Bay ranked #46 with a 3.2% increase (previously #7).
Vacancy Rate
The vacancy rate finished at 4.4%, an increase compared with 4.3% one year ago, although slightly higher than the most recent low of 4.2% reported in Q2 2015. The Class A vacancy rate was 6.2%, while Class B/C properties finished the quarter at 3.0%. Detroit had the lowest vacancy rate at 2.5%. Development of Class A properties is expected to exert upward pressure on the vacancy rate for the high-end market, while demand for Class B/C rentals is expected to remain high amid tighter supply conditions. Overall, Reis forecasts vacancy to increase to 5.1% by the end of 2020.
Nearly 46,000 new multifamily units were completed in the U.S. through the first nine months of 2016, compared to 206,000 units for all of 2015. Reis forecasts 218,000 new units to come online during 2016, representing 2.1% of the existing inventory, and would be the highest annual total on record. Absorption is forecast to reach 179,000 units for the year, falling short of the 2015 total of 188,000. An additional 492,000 units are expected to be completed through 2020, increasing inventory by 4.6%, with absorption expected to total 414,000 units during that time.
Multifamily Investment Sales
According to Real Capital Analytics, sales volume for U.S. multifamily properties totaled $35.0 billion during Q3 2016, higher than the three-year quarterly average of $32.9 billion, and brought the year-to-date total to $111.3 billion. Annual sales volume was on pace to reach $148.4 billion, which would nearly match 2015’s record-high total of $151.3 billion.
Real Capital Analytics also reported that cross-border capital investment represented 5.6% of total volume through the first nine months of the year, down from 12.8% for all of 2015. These transactions accounted for $6.2 billion in volume, one third the 2015 total of $19.6 billion.
Employment Growth
On the economic front, the U.S. Bureau of Labor Statistics reported that employment in United States increased 1.6%, or 2.4 million jobs, during the 12 months ending in October 2016.
Job growth averaged 181,000 per month year-to-date, compared with an average of 229,000 per month in 2015. The largest gains over the last 12 months were in the professional and business services (up 2.7%), construction (up 2.6%), and education and health services (up 2.6%) sectors.
The largest year-over-year increases in employment among metropolitan divisions were Fort Lauderdale-Pompano Beach-Deerfield Beach, FL (up 4.4%), Dallas-Plano-Irving, TX (up 4.2%), and Haverhill-Newburyport-Amesbury Town, MA-NH (up 4.2%).
