Though millennials and baby boomers alike continue to drive demand in the U.S. multifamily sector, the market is losing steam amid elevated supply pressures, rising interest rate concerns and issues related to the length of the cycle.
The good news: U.S. apartment rents advanced 2.3% from January to midyear, according to real estate analytics firm RealPage. Rent prices were up 1% in Q2 compared to the year prior, with Orlando, Florida; Las Vegas; and Jacksonville, Florida; leading the country in annual rent growth.
But RealPage Chief Economist Greg Willett told Bisnow that although rents have risen a record-breaking 32 quarters, the pace at which rents are growing has slowed considerably because of the wave of multifamily product under construction and market headwinds that come with the aged cycle.
“We’re gradually losing some momentum and that's been the case over the last couple of years,” Willett said. “The midyear annual increase of 2.3% is the slowest it's been in this economic cycle. Certainly, the biggest factor is we’ve ramped up the completion volume [and] there is a lot of product moving through initial lease-up.”
The country is on target to deliver upward of 300,000 units this year, similar to that of 2017 and 2018, though more than double that number of units is under construction across the country, Yardi Matrix reports in its June supply-and-demand report.
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A large chunk of the new product set to come online this year is concentrated in a handful of markets, including Dallas, Manhattan, Seattle, Washington, D.C., Houston and Los Angeles. That said, the pace of completions this year will continue to moderate thanks to rising development costs, tighter construction financing and the labor shortage.
“Demand remains strong, as does the need for housing in some high-growth metros. But developers are being more cautious as the cost of land, labor and materials rises, and due to signs that some markets have a glut of new luxury units,” Yardi reports. “Meanwhile, some high-volume markets where development has been rampant are now tapering, leading to a slide in overall stock expansion … Rent growth in these markets is likely to be below average in 2018 as incoming stock outpaces demand.”
In Q2 alone, developers completed more than 75,200 market-rate apartment units in the 150 largest metros in the country, according to RealPage.
“We’re at best only halfway through the period of peak deliveries,” Willett said in a statement. “Ongoing construction of market-rate product totals just a hair under 400,000 market-rate units in the RealPage count, with annual deliveries set to stay right around 300,000 units through the middle of 2019.”
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