AppFolio recently partnered with Axiometrics, a leading provider of apartment market data, to share an in-depth look at how job growth directly affects rent growth in the U.S. apartment market. Over the past two years, rents have grown, occupancy has risen, the economy is finally adding a significant number of jobs and construction of new apartment properties has boomed since 2014.
Nationwide, demand for apartments has grown—not just because of job gains, but also because more people are choosing to rent instead of own. But not all markets are created equal. A closer look at the numbers and the individual markets reveals that of the 20 core markets studied, the strongest rent growth is in the West and South with job growth in these markets above the national average as well. But eight markets, many in the Midwest and East, saw rental growth below the national average of 3.2 percent.
Demographic shifts and housing preferences among Americans has a direct impact on apartment demand and can sometimes indicate future rent growth patterns. From millennials choosing to delay marriage and families to empty-nest baby boomers seeking a maintenance-free, urban-center lifestyle, “renting by choice” is a hot phrase in the real-estate industry. The increased interest in apartment living means we’re entering a unique period for the apartment market, where inventory has not yet caught up with demand in many markets. During the recession we stopped building and stopped aggressively marketing multifamily properties. Since then, the population has grown, migration patterns (internal and external) are favoring cities, and millennials are coming of age and shopping for apartments for the first or second time.
There is now a pent-up demand among millennials for apartments in key markets, many of which are seeing the highest levels of rent growth in our report. But as rent grows, there’s an increased chance for government intervention or regulation. With more and more Americans spending upwards of 50 percent of their income on housing and wages growing slower than rents in the hottest markets, you may begin to see more local, state and even federal governments intervening in markets around the country in order to balance rental growth – as we’ve seen in San Francisco and New York City.
Where is Rent Growing the Fastest?
In the hottest markets, job growth is a key driver of rent growth, but inventory is a major factor that cannot be overlooked. We found the combination of robust job growth and tight inventory in cities like Sacramento, Portland, OR, Colorado Springs, Salt Lake City and Las Vegas driving a rental growth rate above five percent in each market, well over the national average (3.2 percent). Sacramento’s rental growth led the nation at 11 percent, a symptom of very tight supply and strong job growth creating higher demand.
It can take a few years for apartment inventory to catch up with demand. Planning, permitting and construction schedules are all factors that can extend new multifamily construction several months. This, in turn, can have an impact on apartment supply, creating higher demand in markets like Sacramento that are seeing a sudden uptick in job growth, but will only see 255 new units coming on the market this year, which is startlingly low when compared to the anticipated inventory of markets like Portland, OR (4,839 units) and Las Vegas (2,355 units), two metros with comparable population.
Slower Growth in the East and Midwest
The U.S. Apartment Forecast also noticed that eight markets are experiencing rental growth below the national average (3.2 percent). Like the markets at the top, the rental growth rate in these markets can be attributed to the rate of job growth in these metros, with slower job growth placing less pressure on demand. Most of these markets are in the Midwest and East, which have been trailing the West and South in job growth for some time now. Many of these markets also boast an abundance of inventory, which combined with sluggish job growth will impact rental growth.
Anticipated job growth in many of these markets is pegged between one and two percent, below the two plus percent in markets with higher rent growth. Among the 20 markets reviewed, only one market exhibited negative rental growth – Houston – whose apartment market woes can be clearly attributed to slow job growth and surplus inventory significantly curbing demand. A nation-leading 27,649 units are expected to come on the market in Houston this year, a large quantity that in another city might be easily absorbed with strong or even moderate job growth (New York will see 22,848 new units easily absorbed by two percent job growth). But Houston’s in trouble, with the collapse of oil prices seriously stunting job growth to 0.8% which when considered with surplus inventory gives Houston a rental growth rate of -0.3% for the second half of 2016.
What does your market look like? Will job growth continue to climb? Will more new supply have an effect on demand? What’s the end-of-year rent growth forecast for your city? We invite you to check out the AppFolio & Axiometrics U.S. Apartment Forecast and see for yourself how the dual factors of job growth and apartment inventory impact rental growth in your metro.