The apartment vacancy rate was flat in the quarter at 4.8 percent. At year-end 2017 it was 4.6 percent, while at year-end 2016 it was 4.2 percent.
Both the national average asking rent and effective rent, which nets out landlord concessions, increased 0.8% in the fourth quarter. At $1,440 per unit, market rent and $1,370 per unit, effective rent, the average rents have increased 4.9 percent and 4.6 percent, respectively, from the fourth quarter of 2017.
Net absorption was 39,732 units, lower than the previous quarter’s absorption of 50,502 units and below the average quarterly absorption of 2017 of 46,926 units. Construction was 49,944 units, also below the third quarter’s 62,313 units and below the 2017 quarterly average of 61,869 units.
Although 40 metros saw a vacancy rate increase in the quarter, the increase was due to high construction that exceeded net absorption, or occupancy growth. Metros with the highest vacancy rate increase include Albuquerque, Lexington, Nashville, Charleston and Denver.
A deeper look into the net absorption numbers shows that metros with the highest net absorption have had some of the highest job growth in 2018: Houston, Dallas, Denver, Seattle, Orlando, Austin and Phoenix, all of which have had job growth of 2.8 percent or more over the year. Atlanta and Philadelphia also had strong net absorption growth with job growth of 2 percent and 1.4 percent, respectively.
Rent growth was more consistent with occupancy growth as 25 metros saw an increase in effective rent of 1.0% or more led by Albuquerque, Charlotte, Philadelphia, Phoenix and Atlanta that saw effective rent growth of 1.8 percent to 2.1 percent in the fourth quarter. Only three metros posted an effective rent decline: Hartford, San Francisco and Syracuse.
At $2,995 per unit, San Francisco still has the second highest rent in the U.S behind New York City at $3,530 per unit. New York’s effective rent grew 0.5% in the quarter, but it has grown 3.1% over the year, ranking it in the bottom 25% nationally. San Francisco’s effective rent growth for the year was 2.8%. Metros that posted the highest effective rent growth for the year include Phoenix (8.4 percent), Las Vegas (8.1 percent), Atlanta (7.5 percent), Denver (+7.0%) and Charleston (6.8 percent). Markets with the weakest growth include Fairfield County (0.7 percent), Hartford (1.6 percent), Tulsa (1.7 percent), Lexington (1.8 percent) and Columbia (2 percent)
Job growth continues to fuel demand for apartments. The U.S. added an average of 206,000 jobs per month through November of this year, up from an average increase of 183,000 jobs in the same period of 2017. Growth in the metro areas tracked by Reis, however, was 1.8% year-over-year, higher than the national growth of 1.6%.
Apartment construction started to accelerate in 2017 and 2018. This had raised concerns that the apartment market consistently, apartment occupancy growth has nearly kept demand for apartments has been robust throughout 2018. Not only has job growth supported apartment demand, but the weaker housing market has also benefitted the apartment market.
Existing home sales climbed in October and November but had fallen in eight of the previous ten months and is down 7- percent from a year ago. Although mortgage rates have fallen over the last few weeks pushing applications up a bit, the housing market could continue to suffer given the recent stock market declines that have sent jitters throughout the market. Moreover, last year’s tax reform that doubled the standard deduction reduced the incentive to buy a home, which has also helped the apartment market.
We still expect construction to remain robust in 2019 before completions drop off in 2020. Occupancy is expected to remain positive, although vacancy rates are expected to increase, as new supply will outpace demand growth in most metros. That said, stronger apartment demand in a number of metros could push developers to file more permits, which could extend the construction cycle. This is especially likely in New York and Suburban Virginia where Amazon is building two new headquarters and creating 25,000 jobs over ten years.
Our outlook remains favorable given the current conditions of positive job growth and tepid housing sales. The recent momentum should keep rent growth positive even as vacancy rates are likely to edge up a bit in the next few quarters.
