4 Cities Where Growth is Increasing Rental Demand and Rents
Courtesy: Business Insider Kim Betancourt, The Home Story Aug. 7, 2017, 7:31 PM Rental growth has a lot to say about supply and demand in the rental apartment market. Over the past several years, we saw rents move up at above average levels nationwide. We are now seeing many markets losing some steam. They are catching their breath, allowing demand to catch up a bit with an impressive number of new deliveries. But there are still at least a few markets that pop out. Fannie Mae’s Multifamily and Economics Research Group tracks the quarterly multifamily outlook in top metros. Looking at recent trends, we found that asking rents continue to push forward in some areas – building slowly in some, faster in others. These markets illustrate the fundamentals that drive the multifamily market, including one very big factor: jobs. Each rental market is unique, with its own story to tell. The Silicon Desert In Phoenix, the sun has always been a big draw. But today – at least as it concerns the local economy and the multifamily industry – the draw is jobs. According to Moody’s Analytics, Phoenix can expect to enjoy some of the best job growth in the entire country this year. The city will add about 123,000 jobs in 2017 and 2018. That’s the local market’s ticket for keeping demand above the available supply of multifamily homes. What’s even better, the well-paying high-tech sector is helping to put Phoenix on the map. It now accounts for about 5.5 percent of employment in the “Silicon Desert.” That’s well above the national average of 4.8 percent. More jobs mean a growing population. Phoenix has a population of 4.7 million. It should increase 2.3 percent on average per year through 2020. That’s three times the national rate of 0.8 percent. Phoenix also boasts a particularly favorable demographic profile for apartment rentals. Millennials make up about 21 percent of the population. This age cohort is growing in Phoenix at five times the national rate. Over the next five years, it will expand further. That bodes well for future demand for multifamily properties. Rents grew at an estimated 4.5 percent in Phoenix last year. They were growing at an estimated 0.25 percent during the fourth quarter. This dramatic slowdown from earlier in the year was most likely due to seasonal factors. But the amount of new supply coming online was also a factor. Over the coming 18 months, the projection is for an estimated 2.5 percent average growth in asking rents. That looks like a return to more normal times for rents. A Mecca for Tourism It’s all but impossible to ignore tourism in Orlando, FL. The city has recorded a record volume of tourists for five years straight. Last year, there were about 66 million visitors. People are also coming to Orlando to stay. Last year, its population grew by 3.0 percent – significantly better than the national growth rate. Many of Orlando’s new inhabitants were following the job market. The area added 50,000 jobs in 2016 – growing 4.5 percent. According to CoStar, expansion of the metro’s employment base will be well above average through 2021 – at 2.4 percent annually. Orlando suffered from the Great Recession. But it has now clearly turned its back on hard economic times. About 8,000 multifamily rental units are underway. There should be sufficient demand to absorb the surge. Economic expansion and pent-up household formations are driving the demand for apartment rentals. In the meantime, Orlando’s outlook for apartment rentals looks sound over the next several years. The area’s asking rents grew 0.25 percent in the fourth quarter of 2016. Playing Catch Up The Cincinnati metro continues to catch up from job losses during the recession. But its moderate job growth – along with limited amounts of new apartment supply – should restore apartment vacancies and rents to pre-recession levels. As of December 2016, the job market was expanding by 1.6 percent annually, year over year. Companies are taking advantage of Cincinnati’s lower cost of doing business. It is 3 percent lower than the national rate. Moody’s Analytics reports that Amazon is constructing a $1.5 billion, 3-million-square-foot shipping center that will bring many logistic and service jobs to the area. In the meantime, Cincinnati’s population was growing at a middling rate of 0.5 percent in last year’s fourth quarter. Also, the metro’s older population is not an ideal demographic for rental units. According to CoStar, the city’s 55-or-older population has grown by more than 35 percent since 1998. About 13 percent of Cincinnati residents are in the prime 20-34 age cohort for apartments. That’s even less than the 13.5 percent nationally. Dodge Pipeline reports that apartment construction is picking up. Some 3,100 units are underway. An additional 7,200 units are in the planning stages. Rents were up 0.25 percent in the final quarter of 2016. Costly Single-Family Homes Most households in Orange County, CA, can’t shoulder the local cost of homeownership. At the start of 2017, the median-priced single-family home in the area was $635,000. That works to the advantage of long-term demand for multifamily rentals. The strength of the metro’s job growth is also a plus. Orange County’s job market stands out compared with the rest of the country and other parts of Southern California. There have been more than 13,700 apartment unit completions in Orange County since 2012. Another 7,600 are underway. What’s in the pipeline probably won’t be enough to satisfy future demand. Overall, Orange County should continue to be one of the better performing markets in the country. Vacancies there are tight, and rent-growth above average. Asking rents grew 1 percent in the fourth quarter of 2016.