Apartment Market – 2015 Recap


Supported by broad-based employment growth as well as favorable demographic and secular trends, healthy absorption figures supported tight market fundamentals in the national apartment market through 2015 in spite of a wider new construction pipeline. Non-farm employment at the national level increased by 2.0% year-over-year at the close of 2015 on the net addition of over 2.7 million jobs, with the national non-seasonally adjusted unemployment rate decreasing by 60 basis points in 2015, standing at 4.8% at the close of the year.

In addition to employment growth, demographic tailwinds and secular trends in lifestyle preferences remain in place to facilitate a healthy pace of apartment absorption. An improving economic outlook among the prime renter cohort demographic and disciplined mortgage lending standards are expected to continue fostering healthy demand for apartments through at least the near term. Secular trends in lifestyle preferences include the pronounced shift away from homeownership and emergence of renters by choice among the prime renter cohort and baby boomer populations, with both demographic groups appreciating the maintenance-free living and financial flexibility offered by apartments.

As of the fourth quarter of 2015, the national homeownership rate stood at 63.8%, down from 64.0% recorded 12 months prior and a peak of 69.1% in the first quarter of 2005. Sales volume in the for-sale residential market, however, increased at the national level in 2015. While the apartment market is expected to remain on solid footing, competition from the for-sale residential sector is likely to increase in the near term, as rent-to-own metrics are projected to tilt more heavily in favor of ownership in some markets. An improving economic outlook within the prime renter cohort will also test the strength of secular trends, yet the demographic trends in favor of rental units is undeniable. For example, the for-sale residential sector in the Orlando market recorded a significantly strong activity during the year, providing stronger competition to the area apartment owners and operators. In spite of the competition, the population in the Orlando market increased by approximately 3.0% to support healthy apartment demand within the market in 2015, driving the vacancy rate down to 4.2% while rents advanced by over 6.0% during the year.

Recording positive absorption figures across nearly all major markets, demand for apartment units remains strongest in the West and South regions. Positive absorption was recorded throughout the Midwest, but due to a more measured pace of household formation and population growth, demand for apartment units remains modest compared to other regions. Demand in the Twin Cities apartment market remained consistent throughout 2015, and the pace of absorption during the year mirrored that of 2014. Employment growth and demographic trends are driving demand in the Twin Cities apartment market. Household incomes in the Twin Cities metropolitan area compare favorably from a regional perspective, but the median home sale price in the local market remains among the highest in the Midwest and sales prices in the Twin Cities for-sale residential sector continue to increase, preventing many potential buyers from entering into home ownership.

New Construction

New construction added just over 230,000 units to the national apartment inventory in 2015, down approximately 7.0% from roughly 250,000 units delivered in 2014. Despite a modest decrease in 2015, new apartment construction levels continue to remain at or above historical norms within many markets, outpacing demand during the year. Apartment developers continued to focus efforts in growth markets in the South and West regions during the year, with new deliveries over the last 24 months representing over 5.0% of existing inventory in the Houston, Seattle, Denver, Nashville, Austin, and Charlotte markets. New apartment construction activity also remains healthy throughout much of the Northeast and Midwest regions, but deliveries in mature markets are more moderate compared to growth markets in the South and West regions.

New apartment construction volume in the Midwest region during the year was led by the Chicago market, with the Twin Cities, Columbus, and Kansas City markets trailing closely behind in the number of units reaching lease-up in 2015. Similar to trends observed throughout much of the nation, new apartment deliveries in markets across the Midwest region have been heavily concentrated in core and close-in submarkets.

Apartment developers are active in the Twin Cities market, and a greater amount of activity is beginning to occur outside of the Minneapolis core. Approximately 15,000 units have been added to the Twin Cities apartment inventory over the last four years, with a significant percentage of new product being delivered in the downtown and uptown areas of Minneapolis. Nearly 4,000 units are scheduled to reach lease-up in the Twin Cities market in 2016, and signaling that new apartment construction activity will remain healthy through at least the near term, multifamily permitting activity in the Twin Cities metropolitan area increased in 2015. Multifamily construction permits were issued for 4,810 units in 2015, up from 4,608 units permitted in the year prior and 4,634 units in 2013.
TC multifamily permitting


In spite of strong construction levels, the vacancy rate in the national apartment market remained essentially unchanged during the year, rising a mere 10 basis points from 4.3% in 2014 to 4.4% at the close of 2015. Vacancy rates among assets classes, however, have begun to move in diverging directions, with vacancy rates at top-tier, Class A properties softening and occupancy levels among lower-tier properties further tightening and remaining strong. Rising since the first half of 2013, vacancy rates among Class A properties at the national level are approaching the high-5.0% range, while the average vacancy rate in the Class B/C segment has trended lower during this period, declining into the low-3.0% range at the close of 2015.

The concentration of new construction activity aimed at delivering top-tier product within core areas impacted overall vacancy rates in a few markets. Despite healthy demand for apartment units, occupancy levels in the Denver market declined in 2015, with the market’s vacancy rate increasing by approximately 50 basis points during the year. Construction activity in the Denver apartment market is expected to remain strong through the near term, with approximately one-third of new units scheduled to be delivered in the Downtown Denver submarket. Concern over the future direction of underlying fundamentals in the Downtown Denver submarket is not indicative of the outlook for the Denver apartment market as a whole, as conditions are projected to remain strong within several submarkets.

Led by tight conditions throughout markets in the Northeast region, including the New York City, Boston, and Northern New Jersey markets, average vacancy rates remain below the market equilibrium of 5.0% in approximately 85.0% of the nation’s largest 50 markets. Although apartment vacancy rates are strongest within the Northeast region, some of the most impressive improvements in apartment occupancy levels during the year were noted in markets within the Midwest region, including the Chicago, Cleveland, and Detroit markets. Apartment occupancy levels in the Twin Cities market remain among the tightest in the nation. The average apartment vacancy rate within the Twin Cities market continues to hover in the low- to mid-3.0% range, with upward pressure within the Class A segment in the urban core weighing on overall vacancies.

Asking Rent

Outpacing the 3.7% gain noted in the year prior, the average asking rent in the national apartment market increased by approximately 4.0% over the year ended December 2015, as asking rents increased in excess of 2.5% for the sixth consecutive year in 2015. A number of secondary and tertiary markets, including the Portland, Orlando, and Charlotte markets, demonstrated the most robust gains in asking and effective rent growth during the year, while signs of weakness in effective rent growth were observed across several primary markets that have been saturated with new deliveries in recent years.

Moving forward, the pace of new construction activity and concerning rent-to-income ratios across many markets at the national level are anticipated to temper the pace of rent growth. Developers are scheduled to deliver over 300,000 units to the national apartment inventory in 2016, with another 200,000 units likely to reach lease-up in 2017. Meanwhile, rent-to-income ratios have surpassed the pivotal 30.0% market in a number of markets, as rent growth for apartment units has far exceeded wage growth in recent years.

Among regions, asking rent growth was led by the West and South regions. Though occupancy levels remain tight, rent growth remained more restrained in the Midwest and Northeast regions. Rent growth in the Midwest region was led by the Chicago market and followed by the Twin Cities, Detroit, Indianapolis, Kansas City, St. Louis, and Columbus markets, all of which noted asking rent growth in excess of 3.0% year-over-year in 2015. Encouraged by economic improvements and employment growth, asking rents in the Detroit market advanced by 3.0% in 2015, while vacancies declined by 150 basis points to fall below the market equilibrium of 5.0%. Asking rents in the Twin Cities apartment market increased at a healthy pace in 2015, with the Class A segment recording a stronger pace of asking rent growth. Effective rent growth, however, was strong in the Class B/C segment during the year.

Investment Activity

Accounting for approximately 32.0% of all sales activity among the four major property types, sales volume in the national apartment market increased year-over-year by nearly 24.0% in 2015, as the average per unit price increased by roughly 5.0% during the year. Sales prices are exceeding previous peak levels across nearly all major markets at the national level. Apartment pricing continued on an upward trend in 2015 in the face of minimal capitalization rate movement and less aggressive rent growth underwriting assumptions among buyers in stabilized deals.

Capitalization rates in the national apartment market remained stable through the first half of the year, but strong capital flows put downward pressure on capitalization rates in the second half of the 2015. The average capitalization rate in the national apartment market remained essentially unchanged at the close of 2015, declining 10 basis points compared to the year prior, with the average capitalization rate falling just below 6.0% by the close of the year.

Among regions, apartment capitalization rates remain lowest in the West region, with the highest capitalization rates observed in the Midwest region. Regardless of regional location, quality apartment assets in high barrier-to-entry markets across the nation are trading at capitalization rates below 5.0%. In spite of the modest capitalization rate compression observed, the risk premium spread in the national apartment market remains wider compared to historical norms, with a spread of 358 basis points over the 10-Year Treasury as of the third quarter of 2015.

Natl apartment market rates and spreads

Adding to an already crowded pool of buyers, foreign investors have continued to become more active in the national apartment market. Though largely targeting top-tier apartment assets in primary markets, stronger interest and allocations from foreign investors has pushed institutional investors to move into secondary and tertiary markets to win deals.

Sales volume in the national apartment market was consistent through all four quarters in 2015, but strong sales volume during the year was driven by a number of large portfolio and entity-level transactions, including Lone Star Funds $7.6 billion acquisition of Home Properties. One notable single-property transaction at the national level included the sale of Sharon Green, a 296-unit apartment asset in Menlo Park, California. Built in the 1970s, Essex Property Trust sold the 296-unit Sharon Green apartment complex for $245 million or approximately $825,000 per unit in December 2015. The largest transaction in the Midwest region involved a 2,226-unit apartment complex in the northern suburbs of the Detroit market that traded for $216 million or $97,035 per unit in July 2015. Built in the late 1960s, the property, known as Somerset Park, is situated approximately 250 acres within the city of Troy, Michigan. Greater economic activity and a resurgence of business investment in the greater Detroit region is projected to support continued progress and drive investment activity in the Detroit apartment market.

Sales volume in for 50+ unit apartment properties in the Twin Cities market increased by approximately 6.4% over the year ended December 2015, reaching nearly $900 million during the year. Apartment pricing in the Twin Cities market also continued on an upward trend during the year, and the average price per unit in the Twin Cities market increased by 32.0%, rising from $112,850 in 2014 to nearly $150,000 in 2015. Upward pressure on pricing in the Twin Cities market has been supported by a greater composition of sales activity involving newly-built Class ‘A’ properties in the region’s core.

TC apartment sales 50+ units

Notable transactions in the Twin Cities market during the year involved several Class A buildings in the core of Minneapolis, including 222 Hennepin, The Paxon, and The Walkway. These three transactions combined to account for approximately 22.0% of sales volume involving 50+ unit properties in the Twin Cities market in 2015. Several large suburban apartment assets also traded in 2015. Valley Creek Apartments, a 402-unit apartment property in Woodbury, sold as a value-add property for $54.25 million in May 2015, after selling for $33 million five year prior. Sales activity involving small- and mid-size properties also remained healthy through 2015.

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