For Multifamily, Moderation Reigns Supreme in 2016

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The multifamily market may be losing its model status, but it still has its “girl next door” good looks. Despite an increase in vacancy, the apartment market is in pretty good shape with rental rates still on the rise in Q1.

The vacancy rate has increased by 10 basis points to 4.5% in Q1, up 30 basis points from Q1 2015. Asking and effective rents grew by 0.4% and 0.5% respectively during Q1, which is a “noticeable decline” compared to rental growth over the last few quarters. However, over the last 12 months, asking and effective rents both grew by 4.5%. “This is roughly in line with what occurred during calendar year 2015 and is still the strongest [rent growth] over a 12-month period since 2007 before the recession,” said Ryan Severino in REIS’ Q1 2016 Preliminary Apartment Trends report.

In Q1, 41,769 units were delivered, which is less than the last three quarters. Yet, this still is the highest total for a first quarter of a calendar year since 1999, when REIS began tracking data quarterly. In Q1 2015, 36,068 units were delivered. Over the last 12 months, the total number of units completed was 200,142. This is the most over a one-year period since the 1988 high of 216,167 units delivered.

In short, Q1 2016 may not be the best moment for multifamily, but overall the market is still strong, especially when you consider year-over-year metrics. However, demand is slowing.

Net absorption for Q1 was 30,838 units, the lowest quarterly total since the third quarter of 2012. “Demand and supply are now clearly out of balance, a dynamic that should persist for the foreseeable future,” said Severino, who expects more moderate demand going forward.

Nick Fitzpatrick, a Research Analyst with Axiometrics, shares this outlook. When asked on "The Commercial Real Estate Show" what to expect in 2016, he said, “In a word: moderation.”

Large markets are driving moderation with rent growth either declining or remaining stable, but it’s the smaller markets that have really started surging. REIS said the fact that smaller markets are leading the way on rent growth is a continued trend from last quarter. National rent growth is expected to average 3.5% to 4% by year end, says Axiometrics. Taking into account the historical average, this is healthy.

Of the top 10 markets with the highest effective rent growth during the quarter, only three could begin to be considered "large" markets - Atlanta, Phoenix, and Seattle. Atlanta’s annual effective rent growth was 6.7% in March 2016. Atlanta also remains in the top five job-gain metros with an annual gain of 72,500 jobs.

For the U.S. overall, 215,000 new jobs were added in March 2016, according to the Bureau of Labor Statistics. The unemployment rate remains 5.0%.

REIS expects that vacancy will continue to rise for the remainder of 2016, ending the year roughly 40-50 basis points higher than 2015 and that rent growth is likely to slow a bit relative to 2015.

Simply put, the multifamily market only looks bad when compared to its own peak performance in Q2 2015, which was simply unattainable for the long term. 

Bull Realty, Inc., Research