National Apartment Index (NAI)
- Ties to technology, energy and trade characterize the top ranked markets. Expensive housing and tight vacancy rank New York (#1), San Francisco (#2) and San Jose (#8) highly, despite price fatigue from residents. Tight vacancy in Oakland-East Bay (#9) and Miami (#13) and robust job growth in Denver (#3) created a strong run-up, displacing Orange County (#11) and Los Angeles (#15).
- Construction risk caused slides in Austin (#18), Phoenix (#22) and Washington, D.C. (#27), but Dallas/Fort Worth (#14) and Houston (#12) rankings held steady. Low supply, mid-ranked markets such as Philadelphia (#20), Pittsburgh (#32) and Baltimore (#24) offer stabile operational forecasts.
- Southeastern markets Atlanta (#31), Tampa-St. Petersburg (#23) and Palm Beach (#38) made advances and Jacksonville (#44) held steady, but Fort Lauderdale (#29) and Orlando (#36) declined. With the exception of Minneapolis (#4) and Chicago (#17), low momentum resulted in declines for most Midwestern markets.
- GDP estimates reflected surprising strength as of third quarter 2013, posting 4.1 percent annualized growth. Additionally, U.S. employment recorded gains across all sectors, climbing 1.7 percent, and has now recovered 88 percent of the total jobs lost in the recession.
- International trade flows will expand as global austerity eases. Consumer spending and robust recovery in housing will reinvigorate business investment, fueling employment and wage growth. GDP is forecast at 3.0 percent in 2014 and the economy should generate an estimated 2.7 million new jobs.
- The timing and pace of the Federal Reserve’s unwinding of its quantitative easing (QE) programs remains undetermined, but less Fed intervention will mark a return to a “normal” credit environment.
National Apartment Overview
- New supply thus far has been well-matched by rising renter demand, but does add risk to space fundamentals balanced at 4.9 percent vacant. Household formations surged to approximately one million in 2012, nearly double the annual average of the previous five years.
- The number of new units delivered in 2013 increased 84 percent over the prior year to 168,000. Another 215,000 units in 2014 will surpass demand for 176,000 units, increasing vacancy by 20 basis points to 5.1 percent.
- Late recovery secondary markets and mid- to lower-tier assets led revenue gains and effective rents grew 4.2 percent in 2013. Despite a rapid lease-up in new units, Class A assets will bear the brunt of competition from new supply, paring effective rent growth overall to 2.6 percent.
- The spread in yields can buffer incremental increases in interest rates. Additionally, investor demand, economic growth and performance gains will exert downward pressure on cap rates.
- Capital will flow to most market segments and product tiers. Equity funds and institutional and cross-border investors create steady demand for core product in primary markets, while CMBS conduits will support investors seeking yield in secondary markets or through value-add strategies.
Apartment Investment Outlook
- Spreads narrow between market tiers and asset classes. Investor risk profile will determine acquisition strategies. Abundant capital exists for construction as newly delivered units have leased quickly. Facing no new competition, stronger rent growth by Class B/C assets will catalyze the number of renovations.
- Value-add strategies offer stronger returns and the recent dip in the average cap rate signals a recovery in non-premium assets. Sellers have been slow to bring properties to market, however, thereby limiting the number of opportunities.