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US Apartment Market Evades Late Summer Slowdown As Rents Keep Rising

Steady Demand Pushes Vacancies Lower and Contributes to Skyrocketing Rent Growth

By Jay Lybik and David Kahn CoStar Market Analytics September 2, 2021 | 3:15 P.M. The U.S. multifamily sector headed into the third quarter of 2021 on the upswing, as record-setting demand pushed vacancy rates lower in the first half of the year. In turn, multifamily owners capitalized on the scarcity of units and were able to raise rents at a breakneck pace this spring.

But despite such strong momentum, questions remained whether this type of performance was sustainable in the near term because of the ever-evolving public health situation and uncertain trajectory of the current economic recovery. Through the first two months of the third quarter the answer is a definitive yes. Furthermore, the nation appears primed to sustain relatively strong rent growth trends through the end of this year.

As of the end of August, national asking rents are up 9.8% year over year and up 2.4% since the end of June. The strong demand for apartments has persisted over the past two months, pushing the national vacancy rate down 30 basis points since the end of the second quarter. The national vacancy rate of 4.8% is not only a two-decade low for the country, but it represents a roughly 200-basis-point decline compared to the second quarter of 2020, right after the pandemic hit.

The 50 largest apartment markets in the nation all registered positive asking rent growth over the past two months. Notably, San Francisco and San Jose have made the transition to year-over-year positive rent growth during the second half of the summer. This marks a sharp turnaround for both Bay Area cities compared to earlier this year, when rents were down 9% year over year as recently as the end of the first quarter in both markets. Rents in San Francisco are now up 4.8% on a trailing 12-month basis, and year-over-year growth in San Jose is 5.2%.

Rent growth has rebounded in both areas because of a pick-up in demand in recent months, pushing vacancy down 50 basis points in San Francisco and 100 basis points in San Jose since the end of the second quarter.

Buoyed by consistently strong net migration and robust economic recoveries, Sun Belt cities have continued to post the strongest rent gains in the country over the past two months. In fact, nine of the top 10 cities for rent growth in July and August were in the greater Sun Belt region, including Orlando and Tampa in Florida; Las Vegas; Raleigh, North Carolina; Phoenix; Atlanta and Austin, Texas. All these cities rank among the national leaders for year-over-year rent growth as well.

The one exception to this trend is Orange County, a relatively expensive West Coast market. Over the second half of the summer, Orange County rents increased the fastest of any major market, at 5.5%. With the vacancy rate declining 50 basis points to just 2.2%, year-over-year rent growth has skyrocketed to 16%. Orange County is now outperforming the Inland Empire as the rent growth leader for California.

Minneapolis, which historically matches or slightly exceeds the national rent growth rate, finds itself as the slowest-growing large market in the nation. Even with a declining vacancy rate, rents are up only 0.2% since the start of the third quarter in the Twin Cities region. Rents are up only 3% year over year, significantly behind the national average and even behind other laggards including New York and similarly sized Midwestern markets such as Detroit, St. Louis and Kansas City.

Continued strength in the multifamily sector is contingent on both the public health situation and sustained economic growth across the country. The fading effects of the federal government’s fiscal stimulus efforts could contribute to more-modest household formation in the coming months, limiting the ability of apartment owners to raise rents at such a blistering pace in the near term.

However, the record-low national multifamily vacancy rate should ensure relatively robust rent growth performance for at least a few more months, especially considering the slowdown in apartment construction starts since the onset of the coronavirus pandemic last year. In all, market conditions appear primed to sustain the recent momentum through the end of the year, with forecasted rents rising an additional 1.6% nationally.

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