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February 15, 2018
Multifamily Market Posts Mixed Results
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Multifamily vacancy rate measures diverged. The U.S. Census Bureau’s apartment vacancy rate for all rental apartments (in buildings with five or more units) fell 110 basis points (bps) in the fourth quarter of 2017 to 8.3 percent, although that level was up 50 bps from a year earlier. This quarterly slide reverses the previous two quarters’ surprising spike.

However, RealPage’s national vacancy rate for investment-grade apartments rose 30 bps to 5.0 percent in the fourth quarter, remaining unchanged from the previous year’s fourth-quarter figure. This uptick in vacancy rates was most noticeable in the Midwest region, where rates increased 50 bps to 5.0 percent, followed by the West, which recorded a 30 bps rise in vacancy rates to 4.4 percent. Both the Northeast and South saw vacancy rates rise 20 bps to 4.0 and 5.7 percent, respectively.

Multifamily Permits, Starts and Completions Rose

Multifamily permits (5+ units in structure) rose 2.8 percent from last quarter to a seasonally adjusted annual rate (SAAR) of 404,700 in the fourth quarter, down 6.5 percent from 4Q 2016. Total annual multifamily permits receded 2.3 percent from the previous year to a total of 411,200 in 2017, remaining nevertheless at highs not seen since the late 1980s.

Starts rose 12.4 percent in the fourth quarter to a SAAR of 350,300, marking a year-over-year decrease of 13.8 percent. Starts for the year were similarly down 10.1 percent from the prior year’s levels, totaling 342,400 for 2017.

Multifamily completion levels grew 9.7 percent from the previous quarter to a SAAR of 360,700, up 2.7 percent from 4Q 2016. This translated to an 11.8 increase in annual completions to 347,700 in 2017, the highest number recorded since 1988.

Multifamily Absorptions Stay Strong

Net absorptions of investment-grade, market-rate apartments tracked by RealPage pulled back in the seasonally weak fourth quarter to 56,760, down significantly from the 94,712 units absorbed in 3Q 2017. Despite the decline, this was the highest fourth-quarter absorptions level since records began in 2000. The trailing four-quarter sum rose accordingly to 343,037 units, up 20.3 percent from the third quarter and 55.9 percent from a year earlier.

Rent Growth Continues to Decelerate

Same-store apartment rents for professionally managed apartments tracked by RealPage rose 2.6 percent in 4Q 2017, 10 basis points lower than the previous quarter and 50 bps lower than a year earlier.

This rent growth deceleration was most pronounced in the West, with growth down 50 bps from the third quarter. The Northeast and Midwest saw rent growth moderate 30 bps and 20 bps, respectively, from the third quarter, while the South, bucking the trend, recorded a 20 bps acceleration of rent growth in 4Q 2017. Rent growth remained strongest in the West, which has now led the other regions for 23 straight quarters.

The CPI rent index, which covers all rental housing, rose 3.7 percent in 4Q 2017, down 10 bps from last quarter and 20 bps from the fourth quarter of last year.

Transaction Volumes Decline This Year

In the apartment transaction market tracked by Real Capital Analytics, sales volume increased 3.3 percent from the previous quarter to $43.6 billion but was down 7.1 percent from 4Q 2016. Annual volume totaled $150.1 billion in 2017, off 6.9 percent from the prior year’s all-time high of $160.3 billion.

The market value of investment-grade apartments, as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF), rose 0.5 percent from 3Q 2017 and 1.7 percent from a year ago. The NCREIF transactions-based index (TBI), which uses only transaction prices, not appraisal prices, decreased 1.4 percent in the fourth quarter. This was 5.3 percent higher than a year earlier.

Cap rates edged up 10 bps from their record low last quarter to 5.6 percent in 4Q 2017. 

Apartment Returns Fall in 2017

For the second straight year, total returns to apartment investors in 2017 came in well below the long-term average of 10.3 percent, according to data from NCREIF. The total return on an unlevered basis was 6.2 percent—a decline from the 7.3 percent rate from the previous year.

However, apartment returns outpaced those of the office, retail and hotel industries. Industrial properties, on the other hand, returned 13.1 percent, more than double those of any other sector and enough to make the overall return to real estate average 7.0 percent, a little above that for apartments.

NCREIF also calculates returns based on only those properties that changed hands (that is, excluding appraisal estimates of the increase in property values). These transactions-based indexes (TBIs) showed higher returns for apartments. But at 9.0 percent, it still marked a decrease from the 10.9 percent returns in 2016, although it was a pickup from the 7.6 percent level in 2015. The TBI for all real estate came in at 10.7 percent last year, only a little lower than the 11.5 percent returns the year before.

Total returns to apartment REITs edged up last year to 3.7 percent from 2.9 percent in 2016, though also well below the long-term average of 11.6 percent. This was the second consecutive year that returns fell well short of the total return to the S&P 500, which reached 21.8 percent in 2017. However, it should be noted that apartment REITs still outperform the S&P 500 over 10-year and 20-year horizons.

Technical Note. Historical statistics from RealPage, Inc., reflect consolidation of records from the firm’s MPF Research and Axiometrics data sets into a single information source. While individual performance metrics such as monthly rent and net absorption shift to some degree, trends follow patterns reported previously. 

About Market Trends
Market Trends is a high-level quarterly summary of key trends in the industry for apartment executives. Each issue features the latest data on demand and supply trends for apartment residences, along with vacancy rate, absorption and rent trends. In addition, coverage includes an overview of the apartment transaction market with data on apartment sales volume and pricing. Each issue also contains a special analysis of an important and timely trend.
Questions & Comments
Questions or comments on Research Notes should be directed to Mark Obrinsky, NMHC’s Senior Vice President of Research and Chief Economist, at mobrinsky@nmhc.org or 202/974-2329.
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