Is the Apartment Market Slowing?
Rents are climbing and construction of new multifamily units spiked over the past five years. The apartment market has been golden, but some investors are starting to wonder if the sector is showing some signs of slowing.
The apartment market “is increasingly jittery over supply, absolute rent levels, asset pricing, and the potentially wobbly employment backdrop," David Toti, a REIT analyst with BB&T, said recently in a note to investors.
Equity Residential recently revised its outlook lower for the apartment market. It recently had exited the Florida market and now has a bulk of holdings in San Francisco and the New York City area.
"Clearly 2016 will not turn out to be the year we had originally expected due to deteriorating market conditions in San Francisco and New York City, which combined made up 50 percent of our initial growth forecast for the year," Equity Residential CEO David Neithercut said on a quarterly earnings call last week. "These markets have turned to become quite volatile."
Instead, markets that they hadn’t expected to give them the most growth – Boston, Washington, D.C., Seattle, and Southern California – are performing better, Equity Residential notes.
They say that oversupply has become a big problem in some markets.
AvalonBay, which holds a mixture in higher-priced markets and close-in suburbs, is concerned the market is softening too.
"This trend appears to be largely demand-driven as economic and job growth fell short of expectations for the first half of the year, and declining business confidence and investment no doubt was a contributing factor as recent uncertainty and global events have left businesses hesitant to make new commitments," AvalonBay CEO Timothy Naughton said on the company's earnings call last week.
Rents are still rising across the country. However, more landlords are offering concessions. For example, AvalonBay offered renters four times the monetary concessions in the second quarter compared to a year ago, CNBC reports.
Also, commercial lending has tightened lately with loans getting smaller. That will constrict construction and lead to a more balanced market on the high end, CNBC reports.
Source: “Apartment Market ‘Increasingly Jittery’ for Investors,” CNBC (July 29, 2016)
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