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The Year of the Apartment Market ended, well, like the Year of the Apartment Market should have - strong in all aspects.

 

National annual effective rent growth in December 2014 reached 4.9%, the strongest monthly rate of 2014 (and even 2013 and 2012). The last time rent growth was this high was the 5.0% of August 2011. The rate has increased for 10 straight months and was higher than the previous month's level for 11 of 12 months during 2014.

IN THIS ISSUE

 

The December 2014 rate was 219 basis points (bps) higher than the 2.7% of December 2013. It was also a 21-bps increase from November's 4.7%, which is interesting because the end of the year is usually when rents begin to decelerate because of seasonality. We just didn't see that happen this year. 



YTD Rent Growth Strongest of Recovery

 

The year past was a pleasant surprise for landlords and investors - rent growth exceeded expectations almost the entire year. And to cap it all off, we can celebrate 2014 as the national apartment market's strongest year since the Great Recession ended, as measured by year-to-date (YTD) effective rent growth.

 

YTD growth ended 2014 at 5.0%, a heady 42 bps higher than the final 2010 YTD rate of 4.6%. YTD rent growth in 2014 has led the other recovery years since April and was never really challenged the rest of the year. Though the 2014 figure decreased somewhat from the August-September peak of 5.5%, the market's fourth-quarter strength kept 2014 safely at the top of the post-recession year's trend lines.

 

It will be interesting to see if the same trend continues in 2015. Axiometrics' forecast is that rent growth will begin to slow in 2015, as current levels are unsustainable in the long term and the amount of new supply begins to take a toll. 



 


Occupancy Remains Robust
 

Occupancy was 94.6% in December, compared with 94.8% in November and 94.2% in December 2013. Although occupancy is down slightly from the 95% seen in mid-2014, it did not drop below 94% during 2014, and has not gone below that mark since March 2012. Also, the December 2014 occupancy rate is the highest reported in any December since Axiometrics began tracking monthly in 2008.

 

The ability of existing units to maintain occupancy rates at this level, even with the amount of new supply, definitely demonstrates how much demand there is for apartments. Developers and landlords can thank expanding job growth for this trend. 


 


Oil-Price Drop Changes Houston Forecast
 

The massive drop in oil prices during the past two months has caused Axiometrics to revise its forecasts for Houston employment and apartment fundamentals, but it's not as gloomy as some might believe.

 

Now, employers in the Houston-Baytown-Sugar Land Metropolitan Statistical Area (MSA) are expected to add 73,000 jobs in 2015, a decrease of 20,000 jobs from the 93,000 originally forecast and almost 48,000 fewer than were created in 2014.

 

The rate of job gains is expected to soften further to 54,000 jobs in 2016, before rising again in 2017 and 2018. 



 

Job growth is now forecast to decelerate to 2.5% in 2015, a 170-bps decrease from the 4.2% of 2014. Though the decline is drastic, the addition of 73,000 jobs would still be among the highest in the nation, and 2.5% job growth is considered moderately healthy for the Houston metro.

 

The good news is this will in no way be a repeat of the late 1980s bloodbath, which occurred the last time oil prices dropped so severely. At that time, the savings & loan crisis was hitting the Houston-area economy just as hard, if not harder, than low oil prices.

 

The cheaper energy prices also carry some benefits. Two trends that began in the past year or two, because of declining popularity of U.S. dependency on foreign oil, are likely to gain strength as oil prices fall: Some manufacturing - especially plastic companies - that went abroad are coming back to the metro. And, chemical companies are expanding their businesses.

 

The lower oil prices mean lower gasoline prices. The less motorists have to pay at the pump, the more money Houston-area consumers have to spend in the Retail, Healthcare and Education sectors. And with the population forecast to increase by a net 110,000 people in 2015, economic activity is expected to pick up further. 

 

Houston's apartment market finished 2014 with a bang: Annual effective rent growth was 5.3% and average occupancy of 94.5% - even though twice as many new apartment units were delivered than in 2013. That 4.2% job growth and 117,900 added jobs were, of course, the main reasons for the robust apartment market growth.



Axiometrics already forecast some deceleration in Houston apartment fundamentals in 2015; the job growth and apartment rent growth experienced the past few years in the metro would be hard to sustain. Now, we expect rent growth to slow to 3.0% this year, reflecting the fewer number of new jobs and continued increases in new supply.


Trading Places by the Bay


That the San Francisco Bay Area markets have three of the top four annual effective rent growth levels among Axiometrics' top 50 markets (by number of units) is no surprise. It's been that way for months.

 

The news is that San Francisco and San Jose changed places, trading the Nos. 2 and 4 spots. While Oakland was still No. 1 with a December rent-growth rate of 13.9%, one now only has to cross the Bay Bridge to reach the No. 2 market - San Francisco, at 11.6%. San Jose (10.4%) fell behind Denver (11.2%).

 

Northern California also holds the No. 5 spot with Sacramento. South Florida hosts three of the eight markets that ranked from Nos. 6-13.

 

Charleston (No. 12) and Fort Worth (No. 15) re-entered the Top 17 chart, while Hartford and Orlando fell off. Orlando fell to No. 18, just 3 bps behind Nashville, while Hartford dropped to No. 21, but remains the only Northeast market with annual effective rent growth above the national average.

 

With San Diego and Houston sitting at Nos. 19 and 20, respectively, the entire Top 20 resides in the West and South.

 

Odessa had the highest effective rent growth of all markets, at 18.1%. However, the drop in oil prices, discussed above, will affect smaller, more oil-and-gas-dependent markets such as Odessa more negatively than they will larger, more diversified metros such as Houston. 




Please contact us if you have any questions. 
 

Jay Denton
Senior Vice President, Analytics and Research
Email:  jdenton@axiometrics.com
Office: 214-953-2242
Stephanie McCleskey
Vice President of Research
Email: smccleskey@axiometrics.com 
 

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