Zeitgeist – Sign of the Times

Go West, Apartment Investors, Go West

Western Metros Lead the Nation in Rent Appreciation

Recent data from John Burns Real Estate Consulting (JBREC) and Zillow reveals that cities in the western U.S. are poised to lead the nation in rent increases in 2017. Zillow predicts rents will rise in 34 of the 35 largest metros with Seattle, Portland and Denver – Pathfinder stomping grounds – projected to show the highest rent growth at 7.2%, 6.0% and 5.9%, respectively from August 2016 to August 2017.

Zillow’s Top 10 Markets for Rent Growth

August 2016 – August 2017

1. Seattle 7.2%
2. Portland 6.0%
3. Denver 5.9%
4. Cincinnati 5.2%
5. San Francisco 4.9%
6. Los Angeles 4.8%
7. Sacramento 4.7%
8. San Diego 4.7%
9. Phoenix 4.6%
10. San Jose 4.5%

According to JBREC, rent growth in several western metros is largely attributed to an acute supply/demand imbalance. Strong growth in population, job formation and median income has stimulated demand in these supply-constrained markets, pushing occupancy rates and fueling rental rate increases.

Rent IncreaseThis trend is especially prevalent in Seattle – from 2011 to 2015, the Emerald City experienced growth rates of 8.6% in population, 13.5% in employment and 16.4% in median income. During this same period, rents increased a whopping 30%! In August 2016, Seattle’s employment-to-permit ratio – which compares the number of new jobs to new housing permits – stood at 3.2, well above the equilibrium of 1.1 to 1.5 jobs per permit. With demand for housing in Seattle outpacing supply, the average occupancy rate rose to 95.6% in September – the highest level in a decade. As with many of metros in the top 10, Seattle’s economic fundamentals are expected to remain strong and sustain rent growth into 2019.

Although rent appreciation in the major western markets is expected to remain strong in the near-term, experts believe future growth will be more modest. Zillow’s Chief Economist Dr. Svenja Gudell, states “There is good news for renters on the horizon, though. Current renters in these markets can expect rents to slow a bit over the next year. Instead of the 10% rent appreciation we’ve been seeing in some places, expect growth more along the lines of 4-7%. This is still high, but will hopefully give renters some relief.”

2016 Economic Honor Roll

The economy is continuing its slow and steady rebound and the S&P 500, Gross Domestic Product (GDP – a measure of economic growth) and employment statistics are looking positive as we start to tally the grades for 2016 and look ahead to 2017 and beyond.

Unemployment Rate Graph

The S&P 500, currently nearing a historical high, has seen a surge of 7.37% since the election and increased 9.54% in 2016. GDP growth was solid in the third quarter increasing at an annualized rate of 3.2%. The unemployment rate fell to 4.6% in November, the lowest rate since August 2007. The average jobs gain year-to-date for 2016 is 180,000/month and this trend continued in November with 178,000 new jobs. Overall, the U.S.’s economic report card for 2016 would make any parent proud.

Trends Indicate Strong Tailwinds in Multifamily

As multifamily occupancy and rental rates reach historic levels, many are wondering when the investment sector might cool down. Experts say there is still plenty of room to run due to the U.S.’s evolving demographic trends including (i) the propensity for Millennials to delay marriage and children, (ii) a gross undersupply of affordable for-sale housing in many major markets, (iii) labor shortages, land costs and regulatory and lending restrictions which are stifling new development and (iv) an increase in Baby Boomers transitioning to rental housing.

For Rent Sign 1According to Colliers International’s chief economist Andrew Nelson, “supply-demand fundamentals and capital market forces will remain favorable for some time. Recent housing trends have created a positive perfect storm for the multifamily sector, which was the first to recover after the recession and the first to reach new peaks during the expansion. There are a bunch of things working in favor of the multifamily sector.” Adding further fuel to the fire is the homeownership rate, which has fallen to around 63%, down from 69% a decade ago and its lowest level since the Census Bureau began tracking it in 1965. Nelson adds, “They’ve (homeownership rates) gone down substantially and consistently. Some people expected homeownership rates to hit bottom and start to rise again, but there’s been no indication that that the current trend will reverse or plateau.”