After a tumultuous 2016, the national apartment market began 2017 on an even keel, as annual effective rent growth declined by only 1 basis point (bps) to 2.1% and the average rent level increased for the first time in five months.
Though the January rent-growth rate was essentially the same as December’s, it was 212 bps lower than the 4.3% of January 2016, reflecting the moderation of the apartment market over the past year. It was the lowest January figure since 2010.
The average rent level followed form by increasing to $1,277 per unit per month from $1,273 in December. This was the third straight year in which average rent increased by $4 from December to January. The average still has a way to go before regaining the peak of $1,293 recorded in August 2016.
January’s rent-growth steadiness was reflected in the metro numbers, with 27 of Axio’s top 50 markets – based on number of units – reporting increased rent growth, 22 showing decreased rent growth and one market holding exactly even. Just one metro – San Jose – increased rent growth by more than 100 bps, and the Bay Area market still had negative rent growth for the sixth straight month.
In fact, all three Bay Area metros reported strengthening numbers, as Oakland escaped negative territory with 0.0% rent growth in January, compared to -0.5% in December. San Jose’s rent growth increased from -2.4% to -1.0%, while San Francisco’s number went from -2.3% in December to -1.6% in January.
And Houston recorded its first increase in annual effective rent growth in 19 months, climbing to -3.5% in January from -3.9% in December.
Occupancy Continues to Dip
The national occupancy rate declined for the fifth straight month, ending January at 94.4%, a 12-bps decreased from December’s 94.5% and 26 bps lower than the 94.7% of January 2016.
Seasonality played a part in the decline, as the rate has gone down each January since the end of the Great Recession. Occupancy historically picks up in February.
While year-to-date (YTD) effective rent growth in January cannot tell what the year’s trends will be, it’s nice to know that January’s rate of 0.2% is right in line with the post-recession average.
The January YTD rate was the same as that of January 2016 and 1 bps above the post-recession average of 0.2%. The highest recovery-era January YTD rent growth was recorded in 2014, while the lowest was in 2013.
Where is Phoenix’s Urban Core?
After suffering a severe housing price collapse during the doldrums of the Great Recession, Phoenix is roaring back to life, particularly its apartment market. Phoenix rents grew by an average of 6.3% in 2016, the fifth highest growth rate among the top 50 metro areas in the country.
However, unlike other major metro areas, Phoenix lacks a clearly-defined residential “urban core.” Phoenix features a “polycentric” form of development, with multiple employment and residential centers, as opposed to the sort of concentric (common/single center) development that characterizes older cities like Chicago. Polycentric development patterns often result in sprawl, and Phoenix is, according to some measures, the 12th most sprawling metro among the top 50 metros in the US (less spread out than Dallas, but more so than Atlanta and Houston).
As suburban development exploded in post-World War II Phoenix, the central business district downtown began to hemorrhage residents and retail in the 1960s, leading to the appearance of a hollowed-out urban core. Apartment development in Phoenix illustrates the declining fortunes of downtown Phoenix. The vast majority of apartments in Phoenix were built during the 1980s (some 80,000 units were built from 1981-1990), but only 3,519 of those units were built in the true downtown area of Phoenix —only 4% of total multifamily development.
Apartment development in downtown Phoenix accelerated in the early 2000s and through the present day: Some 9% of all new units delivered in Phoenix from 2001-2010 were concentrated in the downtown area, and 6% were delivered downtown from 2011-2017. Part of this may represent the preference of Phoenix residents for suburban lifestyles over urban ones. On the other hand, given the sprawling nature of the Phoenix metro area, it’s possible that urban-minded residents are indeed living in urban areas — but not downtown. Polycentrism means more than one center, and Phoenix very likely has multiple urban cores.
Because the most expensive apartments with the highest rental rates are built in dense, urban areas (primarily due to the lifestyle preferences of the renters), it follows that the highest-priced properties in a given metro are, by and large, urban properties. Likewise, because we assign asset class grades based on rent levels, the top-of-the-line product (Class A+) also tends to represent urban core properties.
Based on this logic, the South Scottsdale submarket of Phoenix is most clearly an urban core submarket in that the average rent per square foot in South Scottsdale apartments is 13 cents more expensive than the next most expensive submarket, North Tempe. Yet, considering the difference in rental rates at the top of the market, there is also good reason to include North Tempe, Central Phoenix South (the true central business district/downtown), Northeast Phoenix and North Scottsdale/Fountain Hills. This is a very broad definition of urban core to be sure; but it follows from Phoenix’s historic pattern of development, as well as the type of clustering of high-end products that we see in urban cores across the country.
When we track the effective rent growth of the different conceptions of Phoenix’s urban core(s), we find some interesting results.
First, we look at the true central business district/urban core of Phoenix (Central Phoenix South submarket). Of note is the remarkable similarity in performance between the presently-considered urban core and the weighted average of the suburban submarkets. In 2016, for example, the average gap between rent growth in Central Phoenix and the suburban submarkets was 2.1%, compared to the national average urban/suburban gap of 2.3%. In general, suburban submarkets are outperforming urban core submarkets across the country.
If we instead use South Scottsdale (the priciest submarket in Phoenix) as the urban core, the average gap between suburban performance and urban core performance in 2016 widens to 3.9%, which is more in line with national trends. In fact, after testing different urban core definitions in Phoenix, South Scottsdale represents the most urban-core-like submarket in Phoenix.
However, there remains a demographic challenge that may impede a full urban core renaissance (however urban core is defined), particularly insofar as the apartment market is concerned. About 36% of the entire US population ages 25-34 (prime renter years) has a bachelor’s degree or higher. In Phoenix, on the other hand, only 28% of all 25-34-year-olds have a bachelor’s degree or higher.
The relatively low higher-educational attainment levels in Phoenix suggests a population of renters that is less likely to be able to afford the top-tier urban core rents. And, perhaps more importantly, this likely means a pool of renters that are simply not as interested in urban core lifestyles as the renter pools in other major metro areas.
n general, urban core submarkets across the United States are underperforming suburban submarkets. In December 2016, urban core rents grew, on average, by only 0.1% while suburban submarkets grew, on average, by 2.7%. This is typical for where we are in the current cycle.
Unlike many other major metros, Phoenix is unique in that it doesn’t have a clearly identifiable urban core, but also in that the places that most approximate an urban core in Phoenix feature relatively strong rent growth (though still below the suburban average). Supporting relatively strong urban core rent growth in Phoenix is the metro area’s late recovery from the housing crash, which means that Phoenix is rising just as other, early recovery metros are falling. Additionally, ASU’s tremendous enrollment growth in recent years along with improved transportation options has increased demand for a more urban-minded lifestyle.
On the other hand, Phoenix’s divergence from the national trend of underperforming urban core areas might imply that what we’ve tentatively identified as the urban core(s) has more in common with suburban submarkets than it does with urban core submarkets around the country.
Irrespective of urban or suburban properties, Phoenix is expected to continue posting strong rent growth figures over the next several years—well above the metro area’s long-term average. A truly strong urban core could be in the cards in the not-too-distant future.
Sacramento No. 1 for 11th Straight Month
Sacramento reported the highest annual effective rent growth among the Axio top 50 markets – based on number of units – for the 11th straight month, but its 9.5% rent growth in January was the lowest for the No. 1 spot since June 2014.
That was the last time none of the top 50 markets had double-digit rent growth. In the 31 months since, the three metros that ascended to the top spot – Oakland, Portland and Sacramento – all came in at 10% or higher.
The list of top markets underwent some change in January. Charleston, SC re-entered the chart at No. 8, while San Diego returned at No. 14. The Northeast region gained representation last month, as the Nassau County-Suffolk County market joined the rankings at No. 17.
Memphis, Dallas and Charlotte fell off the list.
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