The national apartment market has been experiencing a moderation in the recent quarters from the robust performances of 2014 and 2015, thanks to the new supply in the high-rent metros. Also, there seems to be no respite from it anytime soon with the moderation anticipated to continue next year too.
This could cast a pall on residential REIT stocks like AvalonBay Communities, Inc. (AVB - Analyst Report) , Equity Residential (EQR - Analyst Report) and Essex Property Trust Inc. (ESS - Analyst Report) .
Going by statistics, in Q3, the average effective rent nationwide was $1,289 per unit per month as against $1,251 in the prior-year quarter, reflecting growth of 3% year over year, per an Axiometrics study. This marked a decrease from the solid 5.2% rent growth experienced a year ago as well as denoted the fourth straight quarter in which the annual rent-growth rate declined. Also, occupancy level was 95.1% in Q3 2016, down from 95.2% in Q2 2016 and 95.4% in the year ago Q3.
In fact, markets with high rents like San Francisco, New York and San Jose have been much affected and the high end and luxury apartment categories have been flooded with new supply. Though there has been a rise in jobs, the pace has decelerated over the past year. As a result, landlords were compelled to keep rents low to remain competitive. Along with this, job losses in the energy sector weighed on the Houston market.
Moreover, according to Axiometrics economists, rents are expected to increase 3.4% in 2016, which is below the 4.6% upsurge in 2015. Also, markets are anticipated to witness a decline with the annual effective rent growth being projected at just 2.1% in 2017.
The new supply is indeed a major reason for this deceleration in rent growth. Further, with delivery of 267,000 units in 2015, 337,000 new units identified for completion this year and over 272,000 additional units expected to be delivered in 2017; there is no respite from this any time soon. Also, with moderation estimated in the number of jobs additions in 2016 and 2017, demand growth is likely to fall to an extent.
Elevated supply has already affected the performance of residential REITs in the recent quarter. The anticipation of a stressed environment is also likely to affect their ability to command more rents and result in lesser absorption.
However, market fundamentals are still steady in the mid-range markets. Residential REIT, Apartment Investment and Management Company (AIV - Analyst Report) – commonly known as Aimco – with a diversified portfolio, both in terms of geography and price point, is still enjoying relatively stable revenues.
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