It’s a tough time to pick the strongest apartment markets. That’s because the markets with the strongest demand from renters are also the places where developers are the most eager to build new projects. As a result, the strongest and weakest markets so far in 2016 tend to be places where some kind of surprise has upset developers’ calculations—for better or worse.
Strong despite new supply
Rents are growing quickly in a few cities, including Seattle and Nashville, Tenn., despite very high levels of new construction. “The San Francisco Bay Area, Denver and Seattle have easily been the best performing major markets this cycle,” says Jay Denton, vice president with data firm Axiometrics. “Of that group, Seattle is the only one that remains in the upper-tier of rent growth today.”
Housing crash markets come back
Rents are also growing quickly in cities like Sacramento, Calif., and Phoenix, which are finally recovering economically and have seen relatively little new construction since the housing crash. “Phoenix we are predicting to have the strongest rent growth of any metro—[it was] late to the recovery,” says Ethan Vaisman, real estate economist with research firm the CoStar Group. “Las Vegas [is] in same box.”
Energy markets hurt by new supply
Cities that depend on the energy business will have a hard time absorbing new construction. “The impact of decline in the energy sector is easy to see,” says Denton. “Whether we look at major markets like Houston, or smaller markets in West Texas, Oklahoma, Wyoming, or North Dakota, those with a larger share of employment related to oil and gas are near the bottom of the list for apartment performance due to a decrease in the labor force.”
San Francisco losing rent growth momentum
Slower job growth is also slowing the growth of rents in the San Francisco Bay Area, which has been home to some of the strongest apartment markets in the country. The job growth in San Francisco has fallen close to 3.0 percent a year, down from more than 5.0 percent. “The market’s job growth of 3.4 percent is still one of the best in the country,” says Denton. “The market will bounce back once job growth stabilizes.”
New York City slowdown
New York City is another major market where rent growth is slowing down as developers open new apartments. “New York has added a lot of jobs the past few years, but it didn’t materialize into substantial rent growth even though there was a lack of new supply. This year will likely remain sluggish as the first big wave of supply hits,” says Denton.