Apartment landlords can expect a dramatic shift in demand once a large amount of new supply hits markets later this year.
Yardi Matrix reports 320,000 new apartment units will come online in 2017, the largest wave of new supply to hit this cycle — though Yardi department of operations manager Doug Ressler said landlords likely will not feel the impact of the dramatic inventory influx until much later in the year.
“We really think the impact is going to hit in the third quarter of this year,” Ressler said. “We’re going to see an exaggerated transition.”
In February, national apartment rent growth remained unchanged from the month prior, signaling a return to normal growth rates compared to the amplified growth rate levels of 2016. Multifamily rents remained at an average $1,306 last month, according to Yardi Matrix’s monthly survey of 124 markets.
Most of this year's new supply falls within the high-end of the spectrum and is within a handful of markets, including Nashville, Seattle, Miami, Denver, San Antonio, Dallas, Austin and Portland.
Apartment owners in major markets like New York City and San Francisco are already feeling the impact of excess supply. Forced to compete for luxury renters who have an abundance of options, landlords are lowering rents and offering concessions to appeal to renters.
“The Manhattan market is in a significant downward spiral,” Ressler said. “Houston has bottomed out because of the energy industry … [and] San Francisco has really cooled off.”
There are several secondary markets experiencing rapid rent growth thanks to an influx of new demand from renters and companies fleeing the high prices of the city.
U.S. apartment rents rose an average 2.8% year-to-year, Yardi reports, with Sacramento and the Inland Empire leading the way in rent growth, jumping 9.7% and 6.5% in February compared to the year prior. West Coast markets like Sacramento and Stockton are getting an in-migration of renters fleeing high rents in San Francisco, moving to more affordable Class-B and Class-C buildings that have been upgraded.
As demand for affordable workforce housing grows, developers are increasingly turning to value-add projects to turn a profit. By purchasing these properties and giving them a facelift, builders can pay less up front, add a few amenities, boost rents and reap the profits — which tend to far outweigh the initial capital injection.
“Rents are exceedingly going up and up [and] the supply can’t catch up with the demand, especially with … net migration in population increase coming from the East Bay,” Ressler said.
