Rents are Climbing and Occupancy Rates Remain High

Rents are Climbing and Occupancy Rates Remain High

Posted on 24. Oct, 2012 by in Business

Third quarter 2012 results are encouraging for property managers and residential rental property owners nationwide. This trend has been ongoing now for over a year, and it’s not a surprise in lieu of the many challenges and expenses that potential home buyers face, including the ability to qualify for a mortgage. The industry leader in Apartment market research, Axiometrics Inc., recently released survey information and data that confirms the positive rental market trends in all regions of the country.

“The quarter was very steady at the national level,” they recently reported, “with each month’s performance similar to the pace of a year ago. Revenue growth, which combines the effective rent and occupancy growth into one number, measured 1.05% from the beginning to the end of the quarter. This compares to 1.08% over the same period last year.” An interesting anomaly was the effective rent rate decrease from August to September. During that brief period the effective rents actually decreased -0.03%, perhaps too microscopic to be in any way significant.

Year-to-date (YTD) growth peaked at 4.73% in August and fell to 4.70% in September. This is apparently due to the seasonality factor, yet Axiometrics does expect the YTD effective rent growth rate to decline the rest of this year and finish near 3.60% in December. For comparison purposes, they wrote that YTD growth measured 5.17% in 2011 and 5.16% in 2010. This may point to the impact of the growing number of new rental housing units being added and the rate of building growth in the residential multi-unit housing segment. The third quarter illustrates that point as more than 28,000 new units were introduced to the market.

This was almost as many new residential units as the total number in the first six months of the year combined (31,593), according to their research. “The delivery number will continue to escalate for the foreseeable future as it grows back to the relatively stable level the apartment market experienced from 1999 to 2008,” was their assessment. It might not be premature to draw the conclusion that as supply increases the occupancy rates may be somewhat impacted and rent rates may not grow as robustly as they have the past two years. For planning purposes it would be wise to factor in a lower increase in rent rates for the beginning of 2013.

Axiometrics created an illustrative chart in which they compared the national year-to-date effective rent growth rate to the rent growth rates that Real Estate Investment Trusts (REIT) that specialize in residential rental real estate experienced. The chart is introduced with the following explanation:

The REIT subset, which accounts for approximately 12.0% of the Axiometrics database, lowered rents 0.37% between August and September. In addition, YTD effective rent growth fell from 6.74% in August to 6.34% in September. Although the REITs showed more downward volatility in September, they had raised rents aggressively earlier in the year during the prime leasing season. This is the normal pattern we see from properties using a revenue management system, and all the REITs are now using some form of revenue management software. Although REITs are a small subset of our coverage, many clients like to benchmark their results against REIT portfolios because they tend to outperform the overall market. Annual effective rent growth slowed for the fifth consecutive month, declining slightly from 3.69% in August to 3.64% in September. The peak for annual growth this year was 4.14% in April, just as the monthly job growth numbers began to slow. Thirty-five markets still have an annual effective rent growth rate greater than 4.0%. We are also seeing many portfolios, such as the REITs, eclipse the 4.00% mark as well. REIT annual effective rent growth topped out this year at 4.97% in April and is currently at 4.37%. The REITs have been outperforming the national annual growth rate since early 2010, but they did lower rents more than the national average during the downturn.

As a final note of encouragement; there is expected to be a continuing increase in the number of individual and families that will be seeking rental housing going forward. This is primarily due to ongoing real estate foreclosures and the number of homes that are “under-water” (the market value is lower than the debt owed on the property). Thus demand is likely to keep up with the supply for now.

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