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How Will Apartments Fare in 2020?

[Updated: Jan 28, 2020 ] Jan 28, 2020 by Matthew DiLallo
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The apartment sector was somewhat mixed during the fourth quarter, according to the latest trends report by REIS, the real estate solutions arm of Moody's (NYSE: MCO). The group found that while the average apartment vacancy rate across the nation ticked up during the period, rental growth was strong in several areas because the pace of new units coming online is slowing. That has analysts at REIS optimistic about what's ahead for the apartment sector in 2020.

Digging into the latest data

Overall, the national vacancy rate for multifamily properties was 4.7% during the fourth quarter. While it ticked up a bit from 4.6% over the last two quarters, it's an improvement from 4.8% at the end of 2018.

Vacancies increased in 38 of the 82 metro areas REIS covers while declining in 27 of them. Here's a snapshot of the metro markets making the biggest moves last quarter:

Market Q4 Vacancy Rate % change from Q3
Fairfield County, CT 6.4% 0.9%
Charlotte, NC 6.4% 0.9%
Greensboro/Winston-Salem, NC 5.5% 0.7%
Dallas, TX 6.3% 0.6%
Fort Lauderdale, FL 4.8% -0.3%
Oakland-East Bay, CA 3.7% -0.3%
Providence, RI 3.8% -0.4%

Data source: REIS

The metro with the highest vacancy was Charleston, South Carolina, as the percentage of unoccupied apartments in the fast-growing historic city ticked up another 0.1% to 8%. Meanwhile, Central New Jersey, checked in with the lowest vacancy rate at 2.6%, down 0.1% from the third quarter.

Rent growth was also quite mixed. Overall, 13 metro regions experienced rental growth of more than 1%, led somewhat surprisingly by Charleston at 2.1%. Several markets, on the other hand, experienced declines, including Fairfield County, where the average rent fell by 1.2%, which isn’t a surprise given the big increase in vacancies.

One issue that has impacted both the vacancy rate and rent growth is the continued increase in supply. During the fourth quarter, 35,000 apartment units opened their doors to tenants, adding to the growth over the past two years. Overall, 184,000 new units came online last year, which, while less than 2018's record-setting 265,000-unit increase, was still a strong number.

What's ahead for the apartment segment in 2020?

Reis believes that apartment supply growth will peak in 2020 after slowing a bit in 2019. This will keep rents growing at a similar pace, but vacancy could rise.

Meanwhile, it anticipates that apartment demand will remain healthy due to demographics as well as economic growth. The outlook for the economy has brightened as recession fears have subsided thanks in part to swift action by the Federal Reserve to reduce interest rates.

That view bodes well for investors who own or are considering investing in multifamily properties or real estate investment trusts (REITs) focused on apartments. The biggest beneficiaries would be those focused on markets with low vacancy rates and limited supply growth because they should enjoy continued rent growth.

Leading apartment REITs such as AvalonBay (NYSE: AVB) and Equity Residential (NYSE: EQR), for example, focus a lot of their attention on selecting the right markets to own properties. In AvalonBay's case, it targets coastal areas as well as those with a high cost of homeownership, such as Northern California, Southeast Florida, New England, and the Pacific Northwest. Because of that, it benefitted from above-average rent growth in many of its markets.

Equity Residential, meanwhile, faced some headwinds from new supply in many of its top markets last year, but robust demand is sopping that up, which is helping drive up rents. In San Francisco, which is one of its largest markets at 21% of its portfolio, rents grew 4.4% last year according to REIS, pushing them almost as high as those in New York City, another of the company's top markets. With supplies in those markets not expected to grow this year, rents should keep rising, which should boost Equity's bottom line.

Apartment fundamentals remain healthy

While the apartment segment experienced a slight uptick in vacancies and slower rent growth in many markets, the overall environment for apartment owners remains strong. Those already healthy conditions appear as if they'll get even better throughout this year because developers have far fewer new units in the pipeline. Because of that, the vacancy rate should start tapering off, which should help drive rent growth in many markets this year.

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Matthew DiLallo owns shares of Moody's. The Motley Fool owns shares of and recommends Moody's. The Motley Fool has a disclosure policy.