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Apartment rents are growing most quickly in working-class, suburban submarkets that apartment developers have avoided.
“With a handful of exceptions, the neighborhoods posting the strongest rent growth don’t have much ongoing construction,” says Greg Willett, chief economist for Real Page and MPF Research. “These are suburban areas.” They are also often working-class areas with older, less-expensive housing.
In contrast, rents are growing much more slowly in the urban, core markets where the rents are already high. “The heavily-supplied, urban cores have seen the weakest rent growth,” says John Affleck, international economist for CoStar Group. “The high-income tenants in these areas can consider home ownership, and can play off the amply new product one against the other for the best deals.”
Rents grew very quickly in neighborhoods of Sacramento, Calif. The five, U.S. submarkets for rent growth in 2016 are all in Sacramento, according to data from CoStar. Same store rents grew to $1,086 a month in Sacramento’s Rancho Cordova submarket in the fourth quarter, up 12.4 percent from the year before. Rents also grew more than 10 percent in the Folsom/Orangevale/Fair Oaks submarket and the South Sacramento submarket.
“Broadly speaking, these are all working class, suburban areas with little supply,” says Affleck. “Tenants have little leverage. They lack the means to buy a home, and face low vacancy rates and a dearth of new supply.”
Rents grew 13.0 percent in both East Los Angeles and Antelope Valley in Los Angeles in 2016—that makes these two L.A. neighborhoods tied for second place on the list of submarkets with the fastest rent growth, according to MPF Research.
“These are bread-and-butter neighborhoods, rather than the most upscale submarkets,” says Willett. “Stocks in almost all of these locations are very heavy on Class-B-quality inventory, not surprising given it’s those Class-B units that are leading rent growth nationally.”
(MPF’s top submarket for rent growth was Rancho Cordova in Sacramento, Calif.—just like CoStar.)
New construction can also push rents higher. New buildings typically charge higher rents than a neighborhood’s existing inventory. If a small market gets enough new construction to push the average rent higher, that can create a lot of rent growth (particularly if you’re not looking at “same store” rent growth).
Rents grew more quickly in the East Charlotte and Central Avenue submarket in Charlotte, N.C., than any other submarket in the country, according to Reis. Other top submarkets include Ocean Beath/Point Loma Blvd. in San Diego and Lee’s Summit/Prairie in Kansas City, Mo.
“There was new construction that seemed to have a significant impact on these relatively small submarket that pushed the average rent up 17 to 19 percent,” says Barbara Byrne Denham, senior economist in the research and economics department at Reis.
Only one downtown area had rent growth fast enough to earn a place on MPF’s list the of the top 25 submarkets for rent growth in 2016.
“The only downtown submarket that makes the cut is Central Tampa,” says Willett. Same store rents grew an average of 10.9 percent in the Central Tampa, Fla., submarket of Tampa Bay in 2016.
Other downtowns with relatively fast rent growth include other housing crash cities like Las Vegas (9.5 percent), Detroit (9.3 percent), Miami (7.8 percent) and Sacramento (7.4 percent).
Remember a few years back, when experts used to call places like San Francisco and New York City “high-barrier to entry” markets because they were supposedly difficult places to build new apartments? Those cities – along with towns hurt by low energy prices—are now home to the submarkets with the slowest rent growth.
“The bottom performers are really concentrated in a handful of metros, in this case Houston, San Francisco and New York,” says Willett.
