Prelude to Apartment Market Rent Growth?

Last Updated: March 23, 2016By Tags:

The rent growth of asset classes — especially Class A — could predict movement for an entire apartment market.

Contributed by Dave Sorter, March 21, 2016

Many factors enter into forecasting future performance of apartment markets, but often, the movement of asset classes’ annual effective rent growth is a possible indicator of short-term trends.

The direction in which Class A properties are headed can be especially prescient. If rent growth in the apartment communities in this class, representing the 20% highest rents in a market or submarket, begin trending upward, the metro as a whole will likely see a spike within the next couple of months. Class C represents the 20% lowest rent in a market or submarket, while Class B includes the rest.

Conversely, a couple months of sharp Class A rent-growth decreases could indicate the metric will enter a period of decline.

Class A properties are usually the newest, shiniest projects, as well as the most expensive. So increases in Class A rent growth often are signs of a strong metro economy with good job growth and moderate new supply. Class A rent growth has an inverse relationship with new supply.

Class A rent is driven by high-paying jobs, primarily in technology, education and health. Classes B and C, however, fall into the category of “workforce housing.”

Axiometrics looked at two metros that experienced significant rent-growth strengthening in the second half of 2015 and the first two months of 2016, and three other markets with quicker-than average declines. In most cases, class movement was a portent of the trend to come.

The Austin apartment market was at a low point of this cycle early in 2015. Possible oversupply in the urban-core Central submarket somewhat counteracting excellent job growth to reduce annual effective rent growth to less than 4% for the first time since mid-2013. But looking at class trends, Class A was on the way up starting in January 2015 and climbed steadily through August 2015.

Austin started to re-emerge in April 2015, and rent growth surpassed the national average in July.


Job growth remained strong in Austin, and rents had dropped enough in the urban core by March 2015 that they were now affordable to more people, increasing absorption. In addition, suburban submarkets continued to strengthen. The Central submarket still has almost flat rent growth and construction is continuing there, but landlords there don’t have to lower rents as much as they did, allowing the suburbs to drive robust growth.

Sacramento – another high job-growth metro – climbed within 5 basis points of having the highest annual effective rent growth among Axiometrics’ top 50 apartment markets in February and was one of only two of those 50 metros to surpass 8% rent growth, much less double digits.

Unlike Austin’s steady climb, Sacramento’s rent-growth journey has been volatile, as have the asset classes – though rent growth has been an elite 7.9% or higher since June 2014. Its February rent growth was the highest of this apartment cycle – by just 1 basis point over the previous high in May 2015.

The most recent surge began in December 2015, and February’s rate was 150 basis points above November’s. Yet, Class A rent growth began surging in November, and Class C in October.


Houston, Denver and San Francisco have had the most publicized decreases in annual effective rent growth over the past nine months. In San Francisco’s and Denver’s cases, unsustainably high performance combined with decline in job growth caught up with the markets. Job losses caused by the steep decline in oil prices along with undebatable oversupply in the urban-core Montrose/River Oaks submarket can be blamed for Houston’s recent performance.

Houston rent-growth has decreased for 13 of the past 14 months as of February, but the downward trend for Class A (and Class B) began in November 2014 – two months before the metro decline began. Both of the two higher asset classes have been constantly sliding since then, with Class C a little more volatile.


San Francisco was among the top 5 for annual effective rent growth for most of 2014 and 2015, with rates above 11% as recently as September 2015. But the decline from such heights came swiftly, though at 4.7% in February, rent growth is still strong.

Class A started its downward pattern in August 2015, even as the metro rate was continuing to increase. Though Class A rent growth rebounded in September, the other two primary asset classes were starting a descent. Class A’s September strength was a last gasp for the year, as that rate decreased precipitously along with the metro’s through December.

But, as the chart below shows, Class A rent growth has increased slightly during the first two months of 2016. Is that a sign that San Francisco may have hit its valley and rent growth will begin climbing again? Tune in next month.


Denver was another top 5 rent-growth markets during parts of 2015, but declining job-growth rates overall and in most sectors – even though only Information actually lost jobs last year – and affordability issues resulted in a decline to the extent that Denver underperformed the nation in February. That hadn’t happened since December 2009, when the apartment market was in its recessionary tailspin.

The metro’s rent growth began declining in July 2015, but Class A foreshadowed the trend by starting its moderation in May 2015. Classes B and C soon followed.


Though certainly not the only indicator, asset class trends often can predict what will happen in an apartment market in the short term, with a month or two lag. That’s one reason that monthly market intelligence is so important when analyzing individual metros and properties.


Email Subscription

By submitting this form, you are consenting to receive marketing emails from: Apartment News Publications. You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact