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Outlook for Apartment Sector Looks Strong

Outlook for Apartment Sector Looks Strong

Since the election, “uncertainty” has been a buzzword among economists. The direction of U.S. policy is not clear on major issues ranging from immigration to tax reform. But the fundamentals of the apartment sector are relatively strong despite it all.

“I hear people talk about ‘uncertainty,’ but when I boil it down to how it will affect the multifamily market, I don’t see any huge change,” says John Sebree, director in the national multi housing group of brokerage firm Marcus & Millichap.

Rents will continue to grow faster than inflation and the average percentage of occupied apartments will continue to be relatively healthy in 2017. Developers will open more apartments than they did last year, but not enough to push the supple demand balance to the breaking point. And the new class-A construction is still concentrated in “core” downtown markets, leaving suburban markets and class-B apartment buildings relatively free from competition.

High occupancy rates continue

The percentage of apartment units with signed leases shrank a little in 2016, and will shrink a little more in 2017, but not by much.

“We’re anticipating that the occupancy rate backs off by 60 basis points in 2017, but that shift still leaves the rate very healthy at 95.5 percent,” says Greg Willett, chief economist with RealPage Inc., and head of MPF Research. Marcus & Millichap anticipates a slightly stronger, but similar national occupancy rate of 96.0 percent by the end of 2017.

At the same time, developers will complete 363,000 units in 2017, up from 289,000 in 2016. The number of new apartments under construction has increased in almost all metro areas, according to MPF. Marcus & Millichap anticipates a similar 371,000 units of new construction.

Demand not as strong in 2017

Potential changes in federal policy—from a promised federal infrastructure program to higher interest rates—could have a big effect on the U.S. economy. But the apartment business is relatively protected.

The demand for apartments will drop to 252,000 units in 2017, down from 289,000 units in 2016. “Nothing in this outlook is especially different from the expectations we had earlier,” says Willett. “For a while now we’ve been saying that occupancy in 2017 would ease somewhere between 40 and 80 basis points and that rent growth would cool to somewhere in the range of 3.0 percent to 3.5 percent.”

“I am not anticipating any giant surprise for 2017,” says Sebree.

Job growth has slowed over the past year and continues to do so. The market overall is expected to add only up to 2.3 million jobs in 2017, a little less than last year. “The general trend of slowing job growth is affecting rent growth,” according to data firm Axiometrics.

But the U.S. economy still continues to produce new jobs. “Even if job growth slows, it is still growing,” says Sebree.

The apartment sector also continues to benefit from the lack of competition from single-family homes for sale. “At this point in the last real estate cycle, renters were going out and buying single-family homes,” says Sebree.

Core markets face the toughest competition

The strain on apartment properties is still concentrated in the urban markets where most new construction has taken place. “We’re anticipating a competitive leasing environment for top-tier, urban core product,” says Willett.

Apartments further from downtown areas face less competition. “There still should be considerable momentum in performances for suburban class-A projects, as well as for class-B communities in all locations,” says Willett.

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