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Among the country’s especially active building centers, Seattle now ranks as the leader for urban core apartment performance by a huge margin. Annual rent growth is running at 7.2 percent in the heart of downtown, and similar pricing momentum exists in adjacent urbanized zones like South Lake Union, Queen Anne and Capitol Hill.
So far in this economic cycle, urban Seattle has managed to digest some 19,600 units of new supply, and the downtown job base continues to expand very rapidly. Ongoing construction in the urban core tallies about 10,400 units, further putting absorption capacity to the test. Even with this new supply likely to slow urban Seattle’s rent growth pace from the sky-high level recorded now, the Emerald City still appears positioned to remain the nation’s healthiest urban apartment market for at least a couple more years.
Other downtown apartment markets currently recording strong performances include Philadelphia, Orlando, Fla. and Tampa, Fla. Downtown rents across the trio of cities are moving up about 5 percent to 6 percent annually. However, time on the rent growth leaderboard could prove short for these metros. Building activity is kicking into higher gear, after comparatively few urban core deliveries came to market over the past few years.
In the Streeterville and River North neighborhoods of Chicago, just outside of the Chicago Loop, developers opened 2,927 new apartments over the year that ended in the second quarter 2018, according to Marcus & Millichap. Developers also have 3,360 new apartments under construction in these neighborhoods.
“Almost all of those are going to be high-rise units,” says John Sebree, director of the national multifamily housing group with Marcus & Millichap.
Apartment vacancy in the area averaged 5.7 percent and effective rents inched downwards in the second quarter, according to Marcus & Millichap.
Rents have been essentially flat for a while now in a big block of downtowns, including the urban cores in Charlotte, N.C., Los Angeles, Miami, San Antonio, Texas, San Diego, San Francisco, San Jose and Washington, D.C. Let’s also put Manhattan and Brooklyn in this category, although Manhattan performances by individual neighborhood are wide-ranging.
In Los Angeles, downtown rents are now stagnant to slightly down, despite the fact that the metro as a whole registers impressive rent growth near 5 percent. Downtown Los Angeles is still not an especially well-established marketplace, and it has struggled to absorb new supply totaling more than 7,000 units over the past three years. With ongoing construction at 8,000 or so units, a brief period of sizable rent cuts is looking like a possibility.
Charlotte’s uptown/South End neighborhood is another spot where flat rents are in contrast to pricing that’s up significantly—about 5 percent—on the metro level. Still, the neighborhood ranks among this economic cycle’s most stunning success stories in the big picture. Existing stock, which was limited to about 7,200 units at the beginning of 2010, has grown to roughly 16,000 units, and rents grew 22 percent on a same-store basis as inventory more than doubled.
Differing from the pattern anticipated for most urban core submarkets, Charlotte’s uptown/South End area is probably going to gain some performance momentum in the near term. While the 2,800 units on the way in this zone still represent a sizable block of product to be absorbed, ongoing construction is actually at its lowest point in four years.
A handful of urban core markets have consistently recorded rent cuts of late, and they are registering vacancy that reflects weakness beyond just big blocks of new supply moving through initial lease-up.
Effective rents in downtown Portland, Ore. have been gradually drifting downward throughout the past year, and Denver’s urban core has been losing pricing power throughout 2017. Furthermore, Central Portland occupancy of about 94 percent is off roughly 300 basis points from the level recorded a couple years ago, and downtown Denver’s occupancy rate of about 91 percent is down even more drastically.
Building activity is beginning to cool in the urban cores of both Portland and Denver. However, the additional product still in the pipeline suggests rents in both spots will probably continue to slip.
The central Nashville, Ten. submarket ranks among the country’s most aggressive apartment construction zones in the current economic cycle. More than 7,000 of the neighborhood’s 17,000 total apartments came on the market in just the past five years. While same-store rents in the neighborhood have climbed an impressive 25 percent since this construction boom started, pricing is now down more than 2 percent on an annual basis.
With about 4,900 apartments still under construction in central Nashville, the near-term delivery volume will remain elevated. Thus, it would be very surprising for rent change to get back into positive territory within this neighborhood over the next year or two.
Houston’s urban core apartments are really taking a beating. Annual rent cuts are right around the 5 percent mark downtown, and similar or deeper losses are occurring in other urbanized zones like the Medical District, Greenway/Upper Kirby, Greater Heights/Washington Avenue and the Galleria/uptown area. Furthermore, most of these neighborhoods have been suffering rent loss since late 2015 or early 2016.
About half of the 21,800 apartments currently under construction in metro Houston are on the way in the more urbanized submarkets, including some 4,200 units specifically in downtown. Those deliveries point to a continuation of the very competitive leasing environment and the likelihood of further rent losses in the remainder of 2017 and perhaps on into early 2018.
However, looking on to the middle to latter months of 2018, Houston’s urban core apartment market appears positioned for a sharp comeback. Minimal deliveries beginning a year or so from now are only part of the story, as the positive outlook also reflects a healthy economy and, subsequently, strong demand for housing. Rebounding from the energy-related cuts seen earlier, Houston is already back on the list of U.S. employment growth leaders, adding jobs at a pace of more than 50,000 positions annually as of mid-2017.
