Market Spotlight: Indianapolis Sees Highest Rent Growth in U.S.

This article was originally published on Arbor Chatter as "Market Spotlight: Indianapolis Sees Highest Rent Growth in U.S.", and all charts and images are from Arbor Chatter.

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• Indianapolis multifamily rent growth topped the rankings in Q3 2020.
• Vacancy rates remained near record lows for the market.
• The Indianapolis metro area’s economy has performed better than most during the COVID-19 crisis, with unemployment recovering to near pre-pandemic levels.

The Indianapolis multifamily market experienced the nation’s highest rent growth during the third quarter of 2020 and the vacancy remained near record lows. Employment levels recovered to near pre-pandemic levels, driven by a developing technology industry and strong logistics base. While the course of the COVID-19 pandemic will be the ultimate driver of short-term growth, Indianapolis is well-positioned for long-term success.

Rent Growth Continues

According to Moody’s Analytics REIS, effective rent in Indianapolis grew 3.7% year-over-year, the highest rate among major markets in the country. This was well higher than the U.S. overall rate which fell -1.2% during that time. The strong rent growth was not a new trend. Indianapolis outgrew the U.S. overall for 2019 also, at 4.3% vs. 3.7%. Asking rent for Class A properties increased 3.3% year-over-year, compared to 2.2% for Class B/C, going against the national trend of rents in high-end properties falling faster than workforce units.

The market vacancy rate was at historic lows coming into the pandemic, reaching 5.0% at the end of 2019. By the end of the third quarter of 2020, the rate had increased to only 5.2%, although remaining slightly higher than the U.S. overall rate of 5.0%. The vacancy rate for Class A properties increased to 5.8% from 5.4% at year end, while the Class B/C rate improved to 4.4% from 4.5%, following the national trend of stronger workforce housing performance.

Economy Remains Strong

The Indianapolis metro area’s relatively affordable housing prices and cost of doing business has led to positive migration trends over the last few years. The already strong distribution sector has been further boosted by the growth in e-commerce during the pandemic, and the developing technology sector has provided a well-educated workforce. Additionally, the area’s low reliance on hospitality tourism has shielded its exposure to the recession, although the public sector has shown weakness.

According to the REIS COVID-19 impact tracker, the Indianapolis economy has performed better than most major markets during the coronavirus crisis, and the forecast calls for continued strong job growth.

The U.S. Bureau of Labor Statistics (BLS) reported that payroll employment for the Indianapolis metro area had nearly recovered to pre-pandemic levels by the end of October, down only 0.6% since February, or 6,400 jobs. For the U.S. overall, there were 10.1 million fewer jobs at the end of October compared to February, down 6.6%.

The BLS also reported that the unemployment rate for the area was 4.9%, approaching the the level prior to the COVID-19 outbreak of 2.8%, and well below the peak of 13.3%. As a comparison, the unemployment rate for the U.S. overall was 6.9% at the end of October, and peaked at 14.7%.

Outlook

As with most markets in the U.S., the course of the pandemic will determine the outlook for Indianapolis. However, the local economy has low exposure to the industries that have been hit hardest. The multifamily market entered the pandemic on a strong note and the area’s population growth, well-educated labor pool and growing high-tech industries will drive a fast recovery from the COVID-19 slowdown.

U.S. Multifamily Market Snapshot Q3 2020

 

The multifamily real estate market showed resilience in the third quarter, despite the COVID-19 pandemic. Rent growth posted declines, yet rent payments have held steady and the market fared better than other property sectors.

Source: Arbor Chatter

U.S. Multifamily Market Snapshot Q2 2020

 

The multifamily market felt the effects of the COVID-19 pandemic in the second quarter. Following a historically strong 10-year run, rent growth slowed and sales volume declined, as investors showed caution. Although the quarter’s results show that multifamily is not immune to the recession, and the course of the pandemic is still unknown, the sector has shown resiliency as compared with other sectors.

Source: Arbor Chatter

Phoenix Multifamily Market Spotlight Q1 2020

This article was originally published on Arbor Chatter as "Market Spotlight: Phoenix Multifamily on Solid Ground", and all charts and images are from Arbor Chatter.

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• The Phoenix multifamily market had highest rent growth in the U.S. over the last 12 months.
• Investment volume reached a record high in 2019, and price growth significantly outperformed the U.S. overall.
• Employment growth was stronger than the national average, with balanced growth across industries.

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Phoenix Multifamily Market on Solid Ground

Prior to the onset of COVID-19, the Phoenix multifamily market stood on solid ground. The market had the highest rent growth in the nation, along with an active development pipeline and high investment activity.

The Reis COVID-19 Impact Dashboard predicted that a diverse economy and strong recent job growth will protect the market against significant losses. Employment growth ranked sixth in the U.S. over the last five years, with balanced growth across industries. Additionally, the market has moderate exposure to the leisure, hospitality and retail sectors, which are most vulnerable to the impact of COVID-19, accounting for 22% of the labor market.

The depth of the downturn is becoming more apparent, although the course of the pandemic and success of public health measures will determine the duration of the recession. The Valley of the Sun is not immune to the economic effects of the recession that will be felt throughout the nation. However, starting from a position of strength, in the longer term the market is expected to remain attractive to investors given its diverse economy and employment base.

Rental Market

During the last recession the Phoenix multifamily market experienced a steep downturn. However, it rebounded with a strong recovery, which included the highest rent growth in the U.S. over the last 12 months. According to Moody’s Analytics REIS, the average asking rent in Phoenix increased 6.9% during the 12 months ending in March 2020, and has risen every quarter since third-quarter 2010. The rent growth for Class A properties was 6.3% over the last 12 months, while Class B/C rents increased 6.4%.

The Valley’s vacancy rate was 4.6% at the end of the quarter, only slightly higher than the 4.4% rate reported one year ago, despite elevated levels of new construction. The Class A vacancy rate finished at 5.3%, while vacancy in Class B/C properties was 3.7%.

The lowest vacancy rates were in the Maryvale and Sunnyslope submarkets. The Central Phoenix South submarket, where much of the new development has taken place recently, had one of the highest vacancy rates among submarkets, at 6.5%.

“Phoenix multifamily is likely to take some hits in this downturn, given that the area is projected to lose close to 10% of its total employment base,” said Dr. Victor Calanog, Head of Commercial Real Estate Economics for Moody’s Analytics REIS in a statement prepared for Arbor. “Though vacancies are projected to rise and rents are expected to fall, we do not anticipate breaching historic highs for vacancies and rent declines will likely be lower in magnitudes relative to ’08 and ‘09.”

Development

Multifamily development in Phoenix was booming prior to the COVID-19 pandemic, and residential construction has continued to operate as an essential business throughout.

Demand was able to keep pace with supply during the cycle, with 7,200 new units coming online during 2019, alongside 7,400 units of net absorption. More than 9,600 new units are expected to be delivered to the market in 2020 according to the Reis baseline forecast, which would approach totals not seen since the 1980s. However, that total could fall as low as 6,700 under more severe scenarios.

At the submarket level, the Central Phoenix South submarket had the most new units delivered recently, while the Chandler/Gilbert submarket had the most units under construction.

Investment Activity

Phoenix multifamily investment volume reached a record high of $8.2 billion during 2019, according to data from Real Capital Analytics (RCA). However, in the first three months of 2020, investors showed signs of caution, with only $1.3 billion in sales recorded. This was lower than the five-year quarterly average of $1.4 billion, and an annualized rate of only $5.1 billion. Cap rates remained at a historical low of 4.9%, down from 5.1% one year ago.

The slowdown has yet to affect pricing. The RCA Commercial Property Price Index for Phoenix increased an astounding 19.8% for the 12 months ending in March, up from 16.0% one year ago. U.S. overall apartment property prices rose 11.0% year over year, the fastest growth for the sector since 2018, and prices for all commercial properties increased 7.2%.

The duration of the pandemic and the magnitude of how investment activity will be affected are still unknowns, but past downturns may be a guide. RCA data shows that the Phoenix apartment market took 76 months to get from its lowest point during the Global Financial Crisis back up to its peak. This was the third longest recovery time in the country. The average recovery time of the markets covered was 46 months.

Economy

Nearly all measures of the Phoenix economy were strong going into the COVID-19 pandemic. The area had experienced strong employment growth, along with the fastest population gains in the country, including positive in-migration. These factors should help the Valley fare better than most markets, and improves its outlook amid the national recession.

Prior to the pandemic, job growth in the Phoenix-Mesa-Scottsdale, AZ metro area was 3.2% for the 12 months ending in February 2020, significantly stronger than the U.S. overall rate of 1.6%, according to the U.S. Bureau of Labor Statistics. The number of jobs in the metro area fell by 7.6% in April, after Arizona closed nonessential businesses, representing a loss of 229,000 jobs in just two months, but faring better than employment for U.S. overall, which declined 12.9%.

By the end of April, the unemployment rate for the metro area had jumped to 12.3%, up from 3.8% in February prior to the shutdown. That rate is expected to continue to increase in the coming months as the full effects of the pandemic are measured, and may reach beyond the leisure, hospitality and retail sectors.

Las Vegas Posts Highest Multifamily Rent Growth in U.S. in 2018

This article was originally published on Arbor Chatter: Las Vegas Posts Highest Multifamily Rent Growth in U.S. in 2018, and all charts and images are from Arbor Chatter.

Las Vegas experienced the fastest rent growth in the U.S. during 2018, with an 8.6% year-over-year increase in asking rent, according to Reis.

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The Las Vegas multifamily market posted the highest rent growth in the nation during 2018, driven by strong migration trends and a high concentration of prime-age workers. A rise in new construction bolstered a slight increase in the vacancy rate, yet it remained among the lowest nationally. Investment activity continued at a robust pace, although it fell slightly short of 2017’s record level.

Multifamily demand is expected to remain high in 2019, as the local economy expands further into the cycle, especially given that the rapid increase in home prices has reduced homeownership demand.

Rental Market

According to Reis, the asking rent in Las Vegas averaged $1,097/unit at the end of 2018, an increase of 8.6% year-over-year, and the fastest growth in the U.S. Additionally, rent has risen in every quarter since third-quarter 2011. Class A rent increased 9.2% during the year, while Class B/C increased 6.7%. Overall, Reis forecasts rent to increase 5.0% during 2019, then slow into the 3.4% range through 2023.

Driven by the addition of new supply, the market vacancy rate increased to 4.0%, up from 3.2% at the end of 2017, yet it remained among the 20 lowest nationally. Class A vacancy climbed to 5.0%, up from 3.7% one year ago, while Class B/C increased to 2.9%, from 2.7%.

The pace of construction continued to accelerate, with more than 3,800 units coming online during the year. This surpassed the 2017 total of 2,900 units, and marked the highest annual total for the market since 2001. Absorption edged higher, although it was unable to keep pace with new supply, totaling just over 2,500 units.

Reis forecasts indicate that 2018 was the likely peak for apartment construction in the market, with 1,100 units expected to be completed during 2019. Demand is also expected to overtake new supply, as absorption is forecasted at more than 1,300 units for the year.

Sales Market

Multifamily investment has increased substantially in Las Vegas over the last three years. Real Capital Analytics reported that sales volume totaled $2.2 billion during 2018, double the 10-year average of $1.1 billion, although momentum was down compared to 2016 and 2017.

Real Capital Analytics also reported that apartment cap rates in Vegas averaged 5.5% during the year, down from 5.7% at the end of 2017, and the lowest level on record. The average sales price was $122,388/unit for 2018 sales, the highest since 2007.

Economic Overview

The Las Vegas economy has traditionally been dictated by its well-known gaming and entertainment industry. However, the area’s strong migration trends and high concentration of prime-age workers have driven the current cycle.

According to the U.S. Bureau of Labor Statistics, total nonfarm employment in the Las Vegas-Henderson-Paradise, NV, metro increased 3.9% during 2018, as compared with 3.2% during 2017, and 1.8% for the U.S. overall. The largest gains were reported in the manufacturing (up 15.0%) and construction (up 12.3%) sectors, with no major sectors reporting losses.

Vegas-area home prices continued their rapid increase, raising affordability concerns and reducing homeownership demand. The S&P CoreLogic Case-Shiller Las Vegas Home Price NSA Index increased 12.1% during the 12 months ending in November, which was the highest among the 20 cities covered in the index. As a comparison, the U.S. National Home Price Index registered a 5.8% gain.

For more multifamily trends and insights, view our U.S. multifamily market update.