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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
You know who’s partying like it’s 2005? Owners of apartment buildings, that’s who.
After going through some really, really tough sledding coming out of the “great recession,” things are looking up for those of us who own apartments.
And they’re not just looking up, things are absolutely on FIRE. So much so that prices have rebounded, and in some cases, exceeded what we saw pre-crash, because pretty much everyone is full.
The cool thing is, even after a smoking-hot 2014, the good news keeps coming for apartments...
New resident rents rose 5.2% over the 12 months that ended in the second quarter of this year. That’s the biggest rent hike since 1999-2000.
Economic recovery is driving most of the surprising numbers. And one talking head described it like this:
“By far the biggest factor driving up the overall rent growth number is simply significantly more momentum in metros that previously had been performance laggards.”
In regular human speak, that means that we’re seeing a lot of rent growth and strong occupancy in markets that previously had been weak.
In addition, lower turnover and construction delays also helped grow rents and fill vacant apartments. Experts had expected 2015 to be the year when developers finally opened more new units than the apartment markets could absorb all at once, and the number of vacant apartments would begin to rise as rent growth tapered off.
But the “experts” are still really waiting for the coming glut of supply to hit the market. The percentage of vacant apartments stayed at a rock-bottom low 4.2% in the second quarter, the same as the first quarter.
Healing Markets
Rents grew the fastest in apartment markets in the West, topped by Oakland, California; Portland, Oregon; and Denver-Boulder, Colorado. But rents are also growing quickly in Western markets that have taken years to heal from the housing crash.
In fact, price increases, well above the national norm, have spread to the region’s other large markets, including all of Southern California, Phoenix, Las Vegas, and Sacramento. These areas were slow to achieve economic recovery coming out of the recession but now are adding jobs and households at levels that stimulate considerable apartment demand.
Construction Delays Spare Markets
The apartment markets were also stronger than expected this spring because developers took more time than expected to finish new apartments they planned to open.
For several quarters, the number of new apartments opening their doors has been between 10% and 20% less than the scheduled delivery numbers. In theory, the delayed apartment projects could all open in the second half of this year, dragging down the market.
In realty, though, the delays are likely to continue to slow down new construction, as developers struggle to get framing and dry wall laborers to construction sites.
Delays can damage the construction budgets for these projects, but they also cushion the impact of new apartment construction on the apartment markets. Delayed properties have a few extra months to prelease and are opening with fewer vacant apartments than normal. The view of the market is that these new projects just finishing aren’t dragging down overall occupancy to the degree that is typical, which is allowing rent growth at the top end of the product spectrum to remain healthy.
Extra Demand
Demand for apartments is even stronger than experts anticipated. Younger Millennials in their early-to-mid-20s still make up the biggest block of new renters. But older Millennial renters in their early-to-mid-30s are staying in their rental apartments longer — even after they have coupled up and had children.
There are a lot more toddlers in apartments today than was the case a few years ago. Traditionally, those in that age segment have tended to leave the apartment market for single-family housing. But the young urban family segment is becoming more and more important to the apartment industry’s health...
Health that looks like it’s going to continue for a good long time.
Whatcha Think?
Got anything to add about the rental market? Share your comments below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.