Most people think that when a flood of new supply hits the apartment market, occupancy and effective rents will go down. That’s true in most cases, but not in the first half of 2014, according to Axiometrics research. Even though 180,000 units have come on line in the past year, with thousands more on the way in the third and fourth quarters, occupancy and effective-rent growth have been at their highest levels since almost the turn of the 21st century.
Occupancy in May was 95.0 percent, the highest since Axiometrics started reporting monthly in April 2008. Early-release second-quarter 2014 numbers also show occupancy at 95.0 percent, the best quarter since the second quarter of 2001.
Additionally, the 2Q14 statistics show the quarter-over-quarter effective-rent growth rate at 2.4 percent, the strongest performance since the third quarter of 2000.
So why is this cycle different from most others? Here are some answers:
1. Supply is still in catch-up mode.
The influx of all these new units hasn’t been felt yet because almost nothing was built in the early part of the Great Recession recovery, with financing so hard to get. Even deliveries in 2012 and 2013 grew inventory by only about 1.3 percent, below the long-term average of 1.5 percent. And the onslaught of 2014 deliveries, which is expected to total the most since before the recession, will be below or barely reach the long-term average.
Moreover, the number of new units doesn’t account for demolitions and conversions into condominiums, senior housing, and the like. Demolitions, especially, have been occurring at a growing rate as buildings from the 1970s, 1960s, and earlier become obsolete.
So, this game of catch-up has allowed occupancy to rebound more quickly than usual. Occupancy in some metropolitan statistical areas (MSAs) is the highest it’s been this century, which is leading to a sustained period of strong rent growth.
2. Single-family homes aren’t as popular as they once were.
Apartment construction in the past couple of years is about the same as it was in the last cycle (2003 to 2009), but there’s one big difference: Not as many people are moving from apartments to single-family homes.
The homeownership rate of 64.8 percent in the first quarter of 2014, as reported by the U.S. Census Bureau, was the lowest since the second quarter of 1995, when the rate was 64.7 percent. Single-family housing starts have flattened, with negative growth in four of the past 12 months, after a recovery from late 2011 to early 2013. The gap between single-family and multifamily starts has narrowed considerably in the past year.
These figures mean less overall residential supply available to residents, which means higher prices. Even though mortgage-qualification standards are loosening a bit from the noose of two years ago, the price of homeownership is still too high for many people. So, they stay in their apartments longer, even if the rent is somewhat higher.
Which leads us to …
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