Apartment Industry Remains Strong

Date: 11/18/2014

The multifamily sector has seen a terrific year so far, with 5.5% year-to-date rent growth and functionally full occupancy, over 95% in many markets. Stephanie McCleskey, Director of Research at AXIOMetrics, reports the sector is doing well.

“This kind of occupancy and demand gives landlords great pricing power. We’re calling 2014 ‘The Year of the Apartment Market,’” she laughed.

While we were all quite optimistic after a good 2013, isn’t it surprising that growth is so strong? Will that trend continue into next year? It seems AXIOMetrics found data to support optimism for the apartment sector in 2015. Third quarter rent growth for 2014 is about 4.1% nationwide, and employment gains remain steady.  

What we can expect is gentle deceleration throughout 2015, said McCleskey, with rent growth easing down to 2.8-3%, mostly due to new product coming online.  Occupancy will gently decelerate as well, as these numbers typically trail each other closely.

Of course, its employment strength that really shapes the market.  If you look at a market like Atlanta, in the third quarter alone job growth was over 2.4% and the effective rental growth rate was a whopping 7.4%, according to Jeremiah Jarmin, J.D. President, Multi-Housing Investment Group with Bull Realty. “Expanding job markets like this provide opportunities for rent growth, which is attractive to investors chasing yield.”

View from the Leasing Office

We heard a very similar tale from Cindy Clare, President of Kettler Management and past president of IREM. Her firm manages 25,000 units in more than 100 communities.

From her hands-on perspective, all classes of properties are performing well, from the very affordable to the very high-end.  And occupancies are high across the board.

I asked her what kinds of changes her managers seeing in the marketplace. “We are seeing more renters in the 55-64 year group. Boomers and seniors are looking for the ease of a renters’ lifestyle in both urban and suburban settings.”

Technology is changing all kinds of little ways that management does business, in most cases really speeding up the process. Prospects and tenants shop, view, pay rent, even sign a lease, online.

Other changes include

Less print advertising, more creative use of online media

Video walk-through replaces live tour, sent via email to seal the deal.

The onsite office is becoming more open concept, often using amenity space for flex office.

What Attracts and Retains Tenants?

Renters want amenities and high-end finishes. We’re adding stainless steel appliances, laminate floors and granite or quartz counters in many communities. 

Fitness and clubhouse, gaming, pool, outdoor spaces for grilling are really appealing to residents. Pet amenities are huge: dog parks, even a dog wash!

There’s also more of an urban trend, even in the suburbs. Biking and public transit are huge, more and more an important factor.

Wi-Fi Internet throughout is essential to stand up against the competition.

At the High End

Design really matters in urban and A-class properties.  High ceilings, lots of glass, loft spaces and cement floors are the in-demand style for that contemporary feel.

“A higher-end product may take a bit longer to lease,” said Clare, noting that those landlords may have to offer concessions to entice the prime tenants. “But those tenants are out there.”

Amenity spaces are getting larger, while apartments are getting smaller. Well-designed, open plan space means apartments often don’t feel small, despite fewer square feet.  Conversely, Boomer and senior renters are creating a demand for larger apartments. Lifelong homeowners are challenged by downsizing to compact quarters.

The Burbs and the Bs

Apartment living is more popular than ever, the recent data shows.  All asset classes are seeing good growth, but B-class assets lead the way.

“More people are renting apartments, and keeping them longer, than we’ve ever seen before,” said AXIOMetrics’ McCleskey.  Delayed marriage, postponed home buying, and a rising preference for urban living really support the durability of this trend. 

Where are the best opportunities for investors? Look to the suburbs. The high cost of desirable class-A urban living is driving renters further out from the city core.

McCleskey said her numbers indicate that urban core job growth is actually tapering while the suburbs are picking up.

New Supply

What about recovery in the housing industry? What kind of an impact will that have on the rental market?

According to recent numbers, a rise in new single-family homes will have no significant impact on apartments for at least 5 years.  New housing starts are still around a 20-year low, and there is plenty of inventory in most markets. It’s clear that homeownership rates have declined as well, for both positive and negative reasons. Millennials show no signs of giving up the convenient apartment lifestyle.

More new apartments are coming online next year. In 2013 about 160 thousand units came on the market. This increase in supply is just beginning to have a measurable effect, and will begin to slow rent growth over the next few years. There are over 230 thousand units in the pipeline for delivery each year for 2015-16.

Should we be concerned about overbuilding? Not necessarily, says McCleskey. Some markets are building above historic levels, others below. Austin, Raleigh & DC are often cited for overbuilding, but Austin and Raleigh still have positive rent growth.  DC rents are rising below 1%, since job growth is lagging in that market.

The big developers are already planning projects for the next wave, since several years out supply will begin declining again. Overall, there’s really no reason not to be optimistic about the apartment sector!

Just Getting Started?

I asked developer Tom Aderhold with Aderhold Properties who has had a long illustrious career, what advice he has for professionals in or interested in the apartment industry?

He and I agreed that this business can be a lot of fun. He recommends starting out with a job in management, leasing or maintenance, and joining the local apartment association, to meet people and get involved. That’s the best way to find out what you’re good at.  “As you demonstrate your strengths, opportunity will find you,” he said.  

I had to agree.  If you get your education, work hard and build your network, there’s a great career path ahead, and no two days are alike!

Michael Bull, CCIM, is the host of the Commercial Real Estate Show heard on 40 radio stations around the country and CEO of Bull Realty, Inc., a U.S. commercial real estate sales, leasing and advisory firm headquartered in Atlanta. Michael on Twitter and LinkedIn.