• Thu. Apr 18th, 2024

Major Apartment Landlord Sees Rent Growth Start To Slow in These Popular Cities

Bynewsmagzines

Jun 8, 2023
MAA’s Skysong Apartments in Scottsdale, Arizona, near Phoenix has 323 units with an average size of nearly 970 square feet. (CoStar)

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The growing supply of U.S. apartments may be hurting rent growth, especially in markets such as the Sun Belt, and some major owners are noticing particular pockets of strength and weakness across the country.

For MAA, one of the largest owners with a portfolio concentrated in Sun Belt states, popular cities such as Phoenix and Austin, Texas, have gotten “a little weaker” since the start of the year, Tim Argo, the firm’s executive vice president and chief strategy and analysis officer, said at a real estate conference in New York.

On the other hand, Charlotte, North Carolina, is strong and has “held up really well” along with other markets including Raleigh, North Carolina, and Charleston, South Carolina. “What’s been encouraging” is the Washington, D.C., and Houston markets that had been “laggards” have also been stronger, Argo said. Meanwhile, owner Equity Residential said it sees the East Coast outperforming the West Coast.

The real estate industry, including multifamily, is undergoing some self-analysis this week in Manhattan, with a conference sponsored by Nareit, the largest trade group for U.S. real estate investment trusts, that attracted more than 2,500 attendees. Also, the National Apartment Association’s 2023 Apartmentalize meetup in Atlanta drew professionals to swap tips on how to best maintain buildings, improve leasing and carry out other rental business.

Those discussions at the Nareit event included examining shifts in market demand. To that end, Argo said in an interview that the weakness in Phoenix and Austin stems from a combination of added apartment units coming to the market and a slowing job creation pace. “Phoenix has been just a really strong market. … It was just kind of time for it to moderate a little bit,” he said.

As of March 31, MAA had ownership interest in 101,986 apartment units, including those in development, across 16 states and D.C. Its portfolio is mainly in the Southeast, Southwest and Mid-Atlantic regions.

Multifamily supply outpacing demand has led U.S. rent growth to slow to 1.6% from 3.8% at the end of 2022, according to a CoStar report.

U.S. multifamily inventory has risen 2.6% to nearly 19 million units from a year earlier while units under construction jumped 5.6% to nearly 1.06 million, according to CoStar data. The growing supply has led the year-over-year nationwide apartment vacancy rate to climb to nearly 6.8% from 5.2%.

While the Midwest and Northeast have fared the best over the past 12 months, with year-over-year rent growth slowing only marginally, Sun Belt markets have seen significant pullback in rents, the CoStar report said. Phoenix went from a rent growth rate of 17% to a rate of negative 1.9%.

“The downward movement of rents will continue for the rest of 2023, as the risk of recession hangs over the economy and many markets are experiencing over-supply conditions,” according to CoStar.

MAA CEO Eric Bolton said at the Nareit event that his firm, which has a portfolio average rent “more than 20% below” the new supply coming to market, will help it “appeal to a broader segment” of apartment seekers.

“We are returning to a more normal environment in the Sun Belt,” Bolton said. “We do expect to see the supply level elevate through the balance of the year.”

Still, in MAA’s talks with developers and construction companies, Bolton said a major pullback is underway.

“We haven’t seen it manifest in start data” yet, he said. By 2024 or 2025, he predicts, the number of new apartments will drop dramatically.

“The demand side of the curve is what we have focused on,” Bolton said. “If demand isn’t there, you got a problem. We long believe these Sun Belt markets provide demand. … We are not worried about supply. … The market gets very nervous about supply pressure. … What’s hard to underwrite is demand. It’s a function of job growth, migration trends and your outlook on the broader economy. These [Sun Belt] cities continue to capture job and population growth. At the end of the day, I’m going to bet on demand.”

Equity Residential’s multifamily holdings include Azure Apartments in San Francisco. (CoStar)

Equity Residential, which owns or has investments in about 79,900 apartment units, meanwhile, is seeing net effective rent growth of 6% since the start of the year, topping the company’s expectations, amid limited supply in its major markets, Chief Operating Officer Michael Manelis said in a separate Nareit presentation. He added that the firm has also seen an increase in foot traffic, which he said is a proxy for demand.

Equity Residential’s portfolio differs from MAA in that it is concentrated in coastal markets — Boston, New York, D.C., Seattle, San Francisco and Southern California — even as it’s expanding in Denver, Atlanta, Dallas and Austin.

“Business feels very good,” said Equity Residential’s CEO, Mark Parrell. “There’s a lot less supply in markets where we do business.”

However, among its established cities, there’s a difference in performance. The East Coast is “clearly outperforming” the West Coast while the suburban market in general is faring better than urban markets, Manelis said.

New York, for instance, has continued to beat Equity Residential’s expectations as market occupancy tops 97%, Manelis said. He added that the firm sees “strong demand and good pricing power, and very stable occupancy.”

A case in point, Manhattan’s median rent in May has reached record highs for the third consecutive month, according to a report published Thursday by brokerage firm Douglas Elliman with data compiled by appraisal firm Miller Samuel.

Equity Residential, founded by industry titan Sam Zell, who died in May at age 81, last week raised its profit outlook as Parrell noted strong demand across its markets, particularly New York, and lower than previously anticipated delinquency in Southern California. He said in a statement Equity Residential is also “benefiting from limited new apartment supply in most of [its] markets as well as the high prices and low availability of single-family housing in [those] markets.”

D.C. is also trending ahead of projections, Manelis said at the Nareit conference. On the other hand, Seattle’s “operating fundamentals remain below” expectations, hurt primarily by “less pricing power” in the downtown area. The situation is similar in San Francisco, he said.

“Traffic is really bad in Seattle,” he said, adding the city hasn’t seen “in migration” from other states occur after e-commerce giant Amazon, based in the city, asked employees to return to the office May 1, ending its full-time remote working policy installed during the pandemic. “We can hear it from our own employees. It is kind of a wait-and-see moment,” Manelis said.

There’s one encouraging sign of improvement in both Seattle and San Francisco: tenant concessions have declined, he said.

For instance, about 30% of prospective Seattle tenants are being given about a month of free rent, compared with half the amount of renters who got that concession just five to six weeks ago, he said.

“One of the opportunities within our portfolio is the recovery of San Francisco and Seattle,” Equity Residential Chief Investment Officer Alexander Brackenridge said at the Nareit event.

Though the firm’s rents in New York are higher than before the pandemic, they have declined in Seattle and San Francisco.

But Brackenridge doesn’t think that’s permanent.

“We think these cities have these tremendous economic drivers that will help them get back to where they used to be in a reasonable amount of time,” he said.

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