This article is republished with permission from REITCafe.
Dozens of apartments in Pacifica, California, are teetering on the edge of a bluff eroded by El Niño storms. The uncertain fate of these units mirrors national trends, where it is unclear whether apartments will continue to thrive, hold steady, or fall into the “ocean” this year.
Apartments had a very strong year in 2015. Rent growth averaged 4.8 percent and occupancy was 95.8 percent during 2015, according to MPF Research, a division of Real Page. REIS and Axiometrics also reported occupancy in the 95 percent range. Transaction sales volume was strong. CoStar reported $150.6 billion in sales volume for 2015, up 16 percent from 2014.
Apartment market activity slowed late in the year, and opinions are mixed about whether it was seasonal slowing or a sign that markets are cooling. For instance, apartment rents in the hot Silicon Valley declined slightly during the fourth quarter, even though they made strong gains for the year. Similarly, Bloomberg reported that New York City real estate investment trust (REIT)–owned apartment asking rents declined 1.1 percent during 2015.
|TREPP-i Survey Loan Spreads (50–59% LTV)*|
|This Week||Previous Week||Previous Month||End 2015||End 2014|
|10-year Treasury Yield**||1.92||2.05||2.15||2.27||2.17|
Many signs point to future strength in the market, including healthy job growth that has enabled more people to afford apartments. Whether driven by student loan debt or other factors, young people are delaying marriage, children, and homeownership and renting apartments for longer. Downsizing retirees also are driving demand for apartments. Higher interest rates will also make homeownership less affordable and will keep renters in apartments for longer. The proportion of U.S. households occupied by renters has increased steadily from 31 percent in 2004 to 35.5 percent in 2014.
On the other hand, January has been a rocky month for the stock market, raising questions about the strength of the U.S. economy. In addition, construction deliveries have grown, creating worries that demand might not keep up with future supply. MPF Research reported that about 232,000 new units were completed in the top 100 markets over the course of 2015. Deliveries were lower than expected because of construction delays, but with completion dates pushed out, about 443,000 units are now under construction, with 312,000 units slated for delivery in 2016, according to MPF. Affordability, and whether wage growth is keeping up with rent growth, is another issue.
For REITs, apartments were one of the strongest sectors during 2015, and although returns for 2016 have been negative so far, the sector continues to outperform the FTSE NAREIT All Equity REIT Average. The dip in returns could reflect an expected market downturn, or could reflect activity in the broader stock market and indicate a good time to buy.
It is unlikely that markets will sustain occupancy and rent growth at levels that have propelled them forward in recent years, but few clouds are on the horizon to indicate a market downturn. Construction deliveries this year may outpace demand, especially in the markets with the greatest amount of new construction, but investors are generally optimistic about apartments. The sector will most likely maintain growth, but at a slower pace than in previous years.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** – 10 yr. Treasury Yield as of 1/29/2016.