January 23, 2018 by Theron Patrick
Nationally in 2017, the multifamily sector added more than a quarter of a million conventional units to the market. Fortunately, absorption outpaced the growth by nearly 30,000 units and national average occupancy rose 0.4% to 91.7%. Occupancy, however, did get up to 92% by the end of the Q3. The influx of units at the end of the year outpaced the absorption in the final quarter.
The story is much the same for rents in 2017: almost all the growth was in the first three quarters. While effective rents grew in the 7% range nationally through the first nine months of the year, the last quarter saw flattening or decreasing rents. Currently the average apartment unit in a conventional property effectively rents for $1,247 per unit and $1.39 per square foot.
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For most of the country, the first 3 quarters of 2017 were mostly positive across the board. Q4, however, brought a regression and both rents and occupancy flattened or declined. The high plains states saw the opposite with Q4 bringing welcome relief to lackluster performance in the first three quarters. Florida stands out in a good way from the trend with almost universal solid performances across the board.
Seattle found itself among the strong performers nationwide and saw rents rise in the 10% range in 2017 to an average of $1,640 per unit. However, like the national trend, nearly all of the growth occurred in the first half of the year. Portland, currently at $1,303 per unit, had more modest gains for the year.
Effective rents rose only 2.6% over the last 12 months in the northwestern Oregon market. Spokane actually had negative rent growth for the year and average effective monthly rent is down $24 per unit from the beginning of the year to $936. Despite a lackluster 4th quarter with a gain of less than 500 net rented units, Seattle absorbed more than 8,000 conventional units in 2017; an increase of more than 50% from the prior year.
Relatively speaking, in terms of occupancy, Portland fared much better over the last 12 months. The market absorbed more than 5,000 net rented units in 2017 and the 4th quarter of the year accounted for nearly half of those rentals. Consequently, occupancy in the Portland area rose 0.7% in Q4 2017 to a healthy 92.8%.
The California markets managed to absorb more than 22,000 net conventional units in 2017. The vast majority of the units were absorbed within two markets: The Bay Area and the greater Los Angeles area. The Bay area absorbed more than 8,000 units in the last 12 months and 4,000 of those units were absorbed in the 4th quarter alone. However, new construction continued unabated throughout the year. While occupancy is up 1.2% for the year in the Bay Area, average occupancy only grew 0.1% in the 4th quarter.
Los Angeles experienced much the same situation. The market absorbed over 11,000 units in 2017 with just under 4,000 of those units absorbed in Q4 2017. However, average occupancy, while up 0.8% from a year ago, grew only 0.1% in Q4. The two large California markets lagged a bit behind the other California markets in rent gains for 2017. Both Los Angeles and the Bay Area had effective rent gains in the 4% range while the other markets like Sacramento, San Bernardino and the San Joaquin Valley saw gains in the 6-8% range.
The desert region markets mostly kept pace with the national average for effective rent growth in 2017. Las Vegas, Tucson and Phoenix all realized gains of about 7% for the year, and saw slowing – but positive – growth through the 4th quarter. The other smaller markets in this region, however, all gave back effective rent gains in the 4th quarter. Losses ranged from 0.8% in Flagstaff to 1.4% in Reno.
New construction is still producing slight pressure on average occupancy for these markets. Phoenix absorbed over 6,000 units in 2017, and Las Vegas clocked in at just above 2,000 units. Both markets did fairly well by absorbing nearly all of the new units brought online without slashing prices.
The smaller markets such as Albuquerque and Reno, though, experienced negative absorption for 2017. Average occupancy gains were modest at best, with Tucson outpacing the other markets in this region at about 1% annual growth. The good news for all these markets is that average occupancy is still healthy in the 92-94% range.
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