Axiometrics has been tracking apartment data on a monthly basis since April 2008, and didn’t think they’d be saying this until later: The national apartment occupancy rate has reached 95% for the first time in those six-plus years of monthly tracking.
Additionally, the rate of effective rent growth for the year to date ending in May 2014 of 3.7% is the highest rate of growth since the trough of Great Recession. With the highest number of units being delivered this year since the recovery began in 2010, the apartment market is on fire.
Occupancy was exactly 95.0% in May 2014, according to Axiometrics’ recently released May 2014 Market Trends Report. That’s a 20 basis point (bps) increase from the 94.8% recorded in April 2014, the previous monthly high. Occupancy was also at 94.8% in August and September 2013.
The national occupancy rate has increased steadily each of the past four months and is higher than the 94.7% recorded in May 2013, even in the face of increasing supply.
Based upon Axiometrics’ identified supply, about 180,000 new units have been delivered throughout the U.S. during the past 12 months, but absorption has been high. One reason is that most of the new units are priced competitively with Class A product, so about 80% of existing stock has lower rents than the newcomers, making them attractive to those who can’t afford the highest rents. See the discussion about asset class below.
Of course, 154,503 apartment units are slated for delivery during the third and fourth quarters of 2014. So we’ll see in the next several months whether occupancy rates continue to shatter the current record.
Effective Rent Up, 2014 Still Top Recovery Year
Occupancy wasn’t the only record-breaking metric in May. Perhaps because of increasing occupancy, the annualized effective rent growth rate also continued trending upward; May’s 3.5% growth was the strongest in the 16 months since February 2013.
That rate represented a 10 bps increase from the April 2014 rate of 3.4% and a 19 bps increase from 3.3% in May 2013.
The year-to-date (YTD) effective rent growth numbers portray an apartment market having its strongest year since the Great Recession ended. The May 2014 YTD rate of 3.7% was stronger than the 3.4% of 2011 and 2012, which had the next strongest during first five months of the recovery. The 2014 YTD rate will have to exceed 4.2% in June to remain the strongest of the recovery years.
Also, landlords are also getting a higher percentage of asking rent. Concession values were at a post-recession low for the second straight month, decreasing slightly to 0.8% in May 2014 from 1.0% in April. Despite the drop, concessions are still equivalent to four days’ free rent on a 12-month lease.
Class A Still Rising from Dip
Since most of the new units being delivered – and absorbed – are considered Class A in their markets and submarkets, no one should be surprised that rents for Class A properties nationwide are rising.
Annualized effective rent growth at these higher-priced developments was 3.5% in May, compared with 3.1% in April, according to Axiometrics’ breakdown. That increase placed Class A growth above that of Class C, which dipped to 3.1% in May from 3.6% the previous month. Don’t worry about Class C, though; this asset class has performed steadily for the past 1.5 years, staying between 3.0% and 4.0%.
But remember when we discussed above that 80% of the market has lower rents than all the new units coming onto the market? Well, Class B properties led all asset classes with 3.9% annualized effective rent growth in May, up from 3.8% in April. May’s figure is the best since at least December 2012.
Class A, with this month’s increase, fully recovered from a pronounced dip in which the rate of effective rent growth dropped from 3.5% in June 2013 to 2.1% in February 2014.
Meanwhile, occupancy is improving in all three asset classes, and the rate for each was up in May – Class B to 95.4%, Class A to 95.2% and Class C to 94.2%. The rates for Classes A and C increased 0.2% from April, while Class B rose 0.3%.
Let’s not make any bold definitive statements until the June figures are in, but the first quarter of 2014 is shaping up to be one of the strongest quarters in awhile. Stay tuned.
Republished from Axiometrics June 20, 2014 report.