Apartment units are renting at the fastest rate and at the highest levels in 3 years, according to the US Census. Even experts in this industry sector are “surprised” at the rabid demand for apartment rentals and the strong staying power of occupancy rates.
According to John Pawlowski, the residential sector head with Green Street, “People underestimate how far away from homeownership a lot of renters, across the country, even in luxury apartment buildings, are.”
The most recent report from Green Street indicated that asset values of apartment properties are on “firmer footing” than most core property types. Earnings are better than expected with national average asking rent and effective rent (after concessions) increasing by 4.9% and 4.6% respectively in Q4 2018 from Q4 2017.
Additionally, vacancy rates remain unchanged. Barbara Denham, senior economist with Reis, said, “Apartment occupancy growth has nearly kept pace with supply growth (even as apartment construction surged in 2017 into 2018) as demand for apartments has been robust throughout 2018.”
Denham credits a weak-housing market for the boost in apartment demand. “The housing market could continue to suffer given recent stock market declines that have sent jitters throughout the housing market. Moreover, last year’s tax reform that doubled the standard deduction reduced the incentive to buy a home, which has also helped the apartment market.”
Some markets, of course, are better than others but Tony Bozzuto, president and CEO of the Bozzuto Group which develops apartments in major North and Southeastern cities, said, “We are becoming increasingly confident in our forward revenue projections for 2019 and anticipate a +3% rental increase in our portfolio-wide assets. Bozzuto, like Denham, points to fissures in the housing market, such as rising interest rates, and “the continued insurgence of renters by choice.”
Green Street points to REIT stocks as being one of the best performing sectors on Wall Street in 2018 (if any stock can still be called “best performing” after the market’s bloodbath in December.) Pawlowski said, “We have a high level of conviction that those property types (apartment buildings) will outpace returns and will outperform most nonresidential sectors heading into next year.”