Rent growth has now been shrinking each quarter for a full year. In some of the hottest markets, the swiftness of the turnaround came as a surprise. San Francisco in particular saw the rental market cool dramatically, with rents now falling 0.5 percent annually after double-digit gains just a few years ago.
“Job growth isn’t bad in the Bay Area and New York, though the rate has slowed over the past year, so demand for apartments is still relatively strong,” said Jay Denton, Axiometrics senior vice president of analytics. “However, the amount of new supply that has been and will be delivered to these markets is extremely large and is forcing owners and developers to keep rents lower than they would like so they can remain competitive.”
Multifamily construction quadrupled since 2010, peaking in the summer of last year but still elevated. Developers focused on the high end because construction and land costs were so high and that was the only way they could make a reasonable profit. Demand in major cities also gained strength, as millennials finally moved out on their own, preferring the sociability and walkability of urban cores.
Occupancy, while still historically high, is also falling, at 95.1 percent in the third quarter, compared with 95.2 percent in the second quarter and 95.4 percent in the third quarter of 2015.
“Supply and demand are mostly in balance, but where it’s not tends to be in urban cores priced near the upper tier pricing in the market. It has to do a lot with the demand pool. Only so many people can afford that type of product and that rent,” added Denton.
Top markets for rent growth are Sacramento (11.9 percent), Riverside (7.9 percent), Seattle (6.7 percent), Salt Lake City (6.7 percent), Phoenix (6.4 percent), Las Vegas (5.7 percent) and Fort Worth (5.6 percent), according to Axiometrics.
Multifamily construction is now slowing, but there are still thousands of high-end units coming on line. Analysts expect rents will continue to moderate on the highest end, which will trickle down to other, slightly older apartments.