Apartment rents are rising unexpectedly quickly, according to the latest numbers from MPF Research. “The May numbers mark three straight months of better-than-expected rent growth to start 2015’s peak leasing season,” says Jay Parsons, director of analytics at MPF Research.
The rising rents are a good sign that the apartment markets will be able to absorb the hundreds of thousands of new apartments that developers plan to open this year. Many apartment analysts, including MPF, had predicted that vacancy rates would rise slightly this year, approaching 5 percent. MPF is now adjusting its projections, while other data firms are taking an optimistic tone.
Marcus & Millichap anticipated rent growth of 4 percent to 5 percent for 2015 around the beginning of the year. “We are at the higher end of that range,” says John Sebree, director of Marcus & Millichap's National Multi Housing Group. “We don’t expect vacancy rates to rise over 5 percent.”
The apartment markets are likely to be challenge by new construction this year. Data firm Reis Inc., counts over 230,000 units to be delivered this year, up from 168,000 last year. “Completions start to really ramp up in the coming quarters. New construction will likely outpace the rate of net absorption and push vacancies up this year,” says Brad Doremus, senior analyst for research and economics for Reis. “But at the same time, new units tend to come online with higher than average prices, which exerts some upwards pressure on rents.”
MPF’s forecast for 2015 called for occupancy at the end of the first quarter the percentage of vacant apartments to rise by about 40 basis points, and for rents to keep growing, but less quickly than last years, at an average rate of about 3.6 percent to 3.9 percent a year. The firm is likely to improve this outlook after recording strong rent growth in April and May.
Traditional rent growth numbers compare average asking rents. MPF’s data from April and May is a little different, because it measures rent increases in new leases, compared to the previous rents at the same apartments. Rents for new leases increased an average 6.5 percent compared to the prior rental rates in May. Rents to new renters increased 8.4 percent and rents for renewals increased 5.1 percent, according to MPF.
“We've expected 2015 to be a very good year and see that playing out,” says Ron Witten, founder of Witten Advisors, based in Dallas. “Our forecast for the year hasn't changed… it just seems like we're on track.” Witten also resisted the urge to adjust his forecasts earlier this year, after cold weather helped chill demand for apartments in the first quarter. He continues to anticipate an average vacancy rate of well under 5 percent for apartments for the rest of the year.
Reis expects apartment rents to grow 3.5 percent in 2015. “That’s still healthy, albeit it a bit slower than the 3.7 percent growth observed in 2014,” says Brad Doremus, senior analyst for research and economics for Reis. The analysts at Reis were unfazed by slow rent growth of just 0.6 percent in the first quarter. Rents growth usually starts the year slowly grows more quickly in the spring and summer months.
“We actually boosted our rent forecasts up slightly after the first quarter … just because of updates to our outlook for the underlying economic fundamentals,” says Doremus.