With Rent Recovery Things Are Looking Up

Seeing rents rise across the country has given apartment owners and management companies reason to stand up and cheer.

Data from apartment market research analyst firms indicate that the U.S. apartment sector turned in near-record revenue growth performance in the second quarter (Q2 2011). Occupancy climbed 0.7 percentage points during the past three months and effective rents jumped 1.7 percent, taking the total revenue lift for the quarter to 2.4 percent.

“The last time quarterly revenue growth came in at such strong levels was at the height of the tech boom in 2000 and early 2001,” says Greg Willett, Vice President, MPF Research, which tracks industry data for all major U.S. markets.

“That previous peak was driven in large part by huge numbers posted in just a handful of tech-heavy metros, in contrast to the much broader upturn now seen all across the country.”

Average occupancy for U.S. apartments reached 94.2 percent in Q2 (April 1 to June 30), MPF Research reports. That rate is up from a low of 91.8 percent recorded at the bottom of the recent cycle in late 2009, but still below the 95.6 percent occupancy achieved prior to the recession which began in 2008. Typical monthly rent increased to $1,054 as of June. This past quarter’s sizable rent jump accounted for almost half of the total 3.8 percent increase in pricing seen since mid-2010.

Apartment research firm Reis reports that increases in asking and effective rents of 0.5 percent and 0.6 percent, respectively, represent a slight acceleration from last quarter’s increases in asking and effective rents of 0.4 percent and 0.5 percent, respectively.

Improvement in rents nationwide continued in May, according to Axiometrics, another provider of data and analysis on the multifamily housing sector. Effective rents increased 0.70 percent from April levels. Based on results year-to-date, Axiometrics estimates that effective rents will rise 5.9 percent in 2011, which would be the largest annual increase since a rate of 5.8 percent in 2005.

All-Time High In Sight

Most apartment owners agree that the industry is steadily improving, and that Q2 rent rates bring a sigh of relief and polite applause, rather than song and dance. Some suggest that the Q2 numbers simply reflect that owners are getting fair rents from their residents.

Rick Graf, President, Pinnacle, says the current environment of higher rents represents more of a “rent recovery” period than one marked by all-time highs. “We gave a lot of rent back over the last few years and yes we are trying to recover the true value of the unit in the market place,” he says.

A year ago, in the Charleston, S.C., market, one Darby Development property was discounting an $825-per-month apartment to $599.

“Now we are going back to $825 on these units,” says Victoria Cowart, CPM, Vice President of Property Management for Darby Development. “The property does not yet have the occupancy I’d want, but our economic occupancy is on the rise.”
AvalonBay, which, like many publically traded apartment operators has seen its stock price reach a 52-week high during the quarter, says it did away with concessions a while back. It operates mostly high-end apartment communities in coastal and urban markets.

“In the majority of cases, our rents are truly higher,” says Leo Horey, Vice President of Operations, AvalonBay. “Since we have deployed revenue management software to guide pricing decisions, AvalonBay has largely eliminated the use of concessions. Because previous rents seldom included concessions, the new renewal rents reflect a genuine increase in the monthly rent payment to the communities.”

Fred Tuomi, President, Property Management, Equity Residential, says he tracks revenue growth based on year-over-year, same-store growth. “What we are seeing at communities in our core markets (Boston, New York City, Washington, D.C., South Florida, Southern California, Seattle and San Francisco) correlates strongly with what the national apartment data re­search firms are reporting for Q2,” Tuomi says. “In terms of growth in asking base rents, we’re seeing middle single-digits over last year and the stronger markets now up over 10 percent. The trend of the recovery is still very healthy.”

Tuomi says, for the most part, Equity Residential communities are back to their former peak period (summer 2008). “We’ve regained the pricing power we had back then, but that only gets us back to 2008 rent levels,” Tuomi says. “We have at least an additional 10 percent more to come just to make up for the growth we missed out on during the recession, given the typical annual growth rate of 3 percent to 4 percent.”

Tuomi says that rents in Boston, New York and Washington, D.C., did not fall as much since summer 2008 as other major markets. “Today, they are all showing steady growth. Southern California is still the laggard. It is late to the recovery party, but it, too, has been showing momentum lately and still has about 6 percent more growth to go to catch up.”

“At Greystar, we are seeing rents up across the country in almost all of our markets,” says Greystar Chairman and CEO Bob Faith. “We are seeing rents bouncing off the bottom. From peak to trough, rents dropped from 10 percent to nearly 30 percent in some markets, so rents have to increase by a lot more just to recover. In most cases, we see owners not really pouring money into assets because of the increased rents. They instead are just feeding assets less, or are trying to claw back to pro forma in many cases.”

Willett says that while he has seen fairly substantial effective rent hikes for five consecutive quarters, he agrees that these increases, for the most part, simply fill in the hole that was dug by rent cuts in 2008-2009.

“Although a handful of metros are experiencing new highs in pricing, as of mid-2011, most are basically at the break-even point relative to where rents were in late 2007 to early 2008,” Willett says. “Nationally, we actually haven’t quite come all the way back because rents remain way below previous peaks in a few large markets, most notably all the Southern California metros, Phoenix, Atlanta and Las Vegas.”

Willett says that the use of concessions in the pricing structure is headed downward at a significantly substantial rate. “As of mid-year, we’re showing concessions offered for 36 percent of the product examined nationally,” he says. “For the properties that do have concessions, the typical discount is 9 percent. That’s back in line with the numbers seen in 2006-2007, whereas, at the peak of discounting in late 2009 to early 2010, the figures were 53 percent of the product featuring giveaways and 12 percent for the size of the typical discount.”

A Rent Bump Now, But What About Q3?

The return of job growth, even at muted overall levels, is helping fuel strong apartment demand, Willett says. “While increases in total employment aren’t occurring at the pace [the industry] would like to see, it’s important to realize that young adults, who tend to be renters rather than home buyers, are capturing a disproportionately large share of the job additions. In

turn, some who previously went home to live with mom and dad or doubled up into roommate living arrangements are now forming their own households.”

Strong resident retention efforts when leases are expiring also is impacting occupancy numbers, Willett says, because most new renters now translate to additional net demand, rather than replacements for households leaving for other housing options.

“The churn traditionally seen in the resident base just isn’t there at this point,” Willett says. “Very few households are exiting the apartment sector to make first-time home purchases. Even the trade-off from one apartment property to another is down, despite rising rents. Pricing only now is getting back to the levels that were typical prior to the start of the recession in most places. The share of income spent on rent isn’t yet out of line with the historical norm.”

Other than limiting loss of existing renters to purchase, struggles in the for-sale housing market aren’t presently a big influence on the apartment sector’s performance, according to Willett. “Household size and lifestyle preferences largely determine whether you live in multifamily or single-family product. Families who come out of foreclosed homes most often opt for single-family rentals, not apartments. That’s where housing substitution comes into play.”

Reis’ Q2 Trends Report shows that although the recovery in the apartment rental sector continued, the pace of recovery slowed relative to the first quarter.

“This is significant because the apartment market typically strengthens due to seasonal effects during the second quarter as the weather in much of the country improves and the school year ends, both of which facilitate moving,” says Reis’ Senior Economist Ryan Severino. “Therefore, the apartment market recovery was not immune to the changes that occurred in the macroeconomy. Real GDP growth slowed during Q1 after accelerating for two consecutive quarters and labor market data from the Bureau of Labor Statistics has shown a slowdown in hiring in May after a brief period of acceleration earlier this year.”

Severino says that it appears as if these economic developments caused renters and potential renters to act a bit cautiously regarding their leasing and apartment needs during the second quarter. Reis reports that national vacancies fell from 6.2 percent to 6 percent, as the sector posted positive net absorption of roughly 33,000 units. This represents a decrease from Q1 2011 when national vacancies fell by 40 basis points and net absorption totaled roughly 45,000 units, according to Reis.

“We remain cautiously optimistic about the recovery in the economy and the apartment market,” Severino says. “Many of the factors that caused the economy to slow during the first half of this year, such as a dramatic and unanticipated increase in energy prices, a snow-filled winter for a large portion of the country, and the disruption caused by the twin disasters in Japan, are isolated incidents that are likely to have only a temporary impact.

“Moreover, we continue to observe a convergence of positive factors for apartment rentals. First, as the absolute number of jobs continues to rise, demand for housing is increasing, particularly in the 20- to 34-year-old segment of the labor market. However, with the for-sale-housing market still struggling, few of these newly hired young workers have the appetite to commit to buying a home.

Additionally, many will want to wait until they have had some tenure with their current employer or have saved enough money before providing the requisite down payment for a house.”

Despite this quarter’s slowdown, the ongoing recovery and tightening vacancies continue to generate greater pricing power on the part of owner/operators, demonstrated by the continued increases in asking rents. Furthermore, effective rent increases continue to outpace asking rent increases, indicating that concession packages continue to erode.

Severino says that because the slowdown in the economy is likely to be temporary, barring some unexpected shock from the global economy, he expects the recovery to continue throughout 2011. “Vacancies should continue to decline while rents rise at an even faster pace than we observed in the first half of the year,” he says.

With a shortage in new supply for 2011, Severino says Reis expects vacancies to continue to decline throughout the year as households favor the rental market. “Although the improvement in the apartment market will likely spur new construction, any boost from these new units will not materialize until late 2012,” Severino says. He adds that data from various sources already indicates a surge in applications for the financing of construction and development of new multifamily buildings.

Archived from the article written by Paul R. Bergeron III for Units Magazine – August 2011.
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