One Year After Peak Annual Effective Rent Growth, Apartment Market Results Remain Solid

Posted on August 23, 2012

In July 2011 the apartment market was on a tear with effective rents growing at an annual rate of 5.32%. Annual effective rent growth had increased in 18 out of the prior 21 months, occupancy achieved a rate (94.1%) not seen since 2006 and yet, despite this phenomenal growth, very little new apartment construction had begun.

What has happened since then? Nationally, the word that comes to mind in regard to rent and occupancy growth is “stability.” The national annual effective rent growth rate has remained close to 4.0% every month since November 2011. Currently, annual growth is running slightly below that rate, but it could bounce back in August and September.

Class A and B properties also remain strongly occupied, but their occupancy rate has seen only minimal growth over the last year, hovering right around 95.0%. Class C occupancy has leveled off on a sequential basis, but it still has the best year-over-year growth.

The number of new apartment construction starts across the country has increased over the past 12 months. While the number of new starts is still below the long-term average, developers (and their lenders) have certainly responded to the strength of the apartment market. Many of the new starts, however, did not happen until after effective rent growth had peaked (July 2011) as it simply took time to get plans restarted after the downturn.

Breaking down the start numbers, we are tracking more than 237,000 units that began construction between August 2011 and July 2012. The 15 months before August 2011 have significant meaning, however. Annual effective rent growth turned positive at the national level in May 2010 and peaked in July 2011. During that stretch, only about 74,000 units were started.

While the total starts number sounds large, deliveries will be spread out over the next few years. Only about 87,000 units will deliver in 2012, with approximately 56,000 coming in the last six months of the year. Another 129,000 will be delivered in 2013, while the more complicated construction types will lag into 2014 and beyond.

Now that it is apparent rent growth has been moderating since its peak last summer, what will this moderation do to the number of starts in the future? Will starts begin to level off, or even decline? Could improved job growth spur new construction to grow closer to the long-term average? The answers to these questions are really market and submarket specific, but we do not show construction activity slowing in the near future – there are still over 875,000 units in various stages of planning across the country.

The properties that have delivered so far have performed remarkably well. The first significant wave of new construction began to deliver in July and the results were very positive. Across the country, the average absorption rate for lease up properties was more than 20 units per property per month. The average concession for lease up properties was less than two weeks free, with many of the top markets offering an average of one week or less.

Washington, DC averaged 21 units absorbed per lease up property in July, but the concession value has been close to a month free for properties there. In Dallas, lease up properties absorbed an average of 42 units in July, and only offered about one week free to achieve that rate.


Jay Denton,