AppFolio: Apartment rents to keep rising, just not as quickly

Posted on August 19, 2016

What word best describes the U.S. apartment market today? AppFolio, in its latest research report, points to “growth.”

That’s the key word that the company, which provides property-management software, refers to in its 2016 Apartment Forecast report. The difference this year? Apartment rents will still rise across the country, but not by as much as it has during the last two-plus years.

AppFolio predicts that apartments rents will have risen by 3.2 percent in 2016 by the time the year ends. That’s still impressive, but it’s a bit of a slowdown from the last two years. AppFolio points to the high number of new apartment units hitting the market. The company reports that at least 247,647 new apartment units have or will enter the market in 2016. As AppFolio says, supply is slowing beginning to outpace demand in some markets.

Nat Kunes, AppFolio’s vice president of product, said that this news shouldn’t be a surprise. Developers have simply added so many new apartment units to the mix, it was inevitable that rent increases would eventually start to slow.

“If you have more demand than supply, rents tend to grow quite dramatically,” Kunes said in an interview with Midwest Real Estate News. “When supply catches up, though, the prices tend to stabilize more. That’s what we are starting to see now.”

Three Midwest markets are among those that AppFolio says will see a significant slowdown in rent growth. Kunes said that the company predicts that Chicago apartment rents will have grown 2.2 percent in 2016, Milwaukee’s 2.6 percent and Minneapolis’ about 2 percent. All three metro areas, then, will see apartment rents rise at a more sluggish pace than in most of the rest of the country.

“There are definitely some markets where supply is catching up,” Kunes said. “It has taken a while. During the recession, most construction stopped. The demand for apartment units was growing, but new construction wasn’t. We were playing catch-up. Many markets are just starting to get caught up, but some haven’t yet.”

Kunes points to Minneapolis as one of those markets in which the supply has caught up with demand, which is why apartment rents, while still growing, are growing at a slower pace in the Twin Cities area.

“Owners might not like that, but it is a benefit to residents moving into the city,” Kunes said.

In many cities in which the growth in apartment rents is taking place at a more modest pace, developers today are focusing on pricier luxury apartment units and little else, Kunes said. That is a challenge for many renters, as these luxury apartments come with sky-high rents that are out of the reach of too many potential renters.

Kunes said that Chicago is a good example of this. The city is seeing plenty of luxury apartment buildings added to the skyline. These buildings come with amenities such as valet parking and concierge services. But they aren’t coming with monthly rents that are affordable to most potential renters.

“Developers are doing that because when they build a typical apartment complex, they won’t see as much potential rent growth,” Kunes said. “If they build a luxury development, they get more rent growth.”

The strategy is often different in cities in which apartment rents are growing at a faster pace, Kunes said. Developers here can add a wider variety of apartment types – including those that rent at lower prices – and still see a solid increase in rental rates over time.

Overall, AppFolio says that the markets with the strongest rent increases are clustered in the Western and Southern portions of the United States. Sacramento, California, as of the first half of the year, had the highest effective rent growth so far, with apartment rents rising by 11 percent.

Other markets seeing strong rent increases include Portland, Oregon; Colorado Springs, Colorado; Salt Lake City; Las Vegas; Tucson; Atlanta; San Diego; and Austin, Texas.

Markets seeing below-average rent growth include Milwaukee, New York City, Chicago, Minneapolis-St. Paul, Baltimore, Philadelphia and Oklahoma City, according to AppFolio.