The State of Apartment Demand as 2018 Draws Near: Three Key Questions to Ask

State of apartment demand 2018

Despite several indicators that the apartment market might taper in 2017, it was another solid, ultra-productive year for the industry.

Many of the industry’s worst fears did not surface – at least not to a significant degree – as demand remained high and rental rates remained robust. But many of the same concerns entering 2017 endure, and industry professionals have a mixed view of what’s to come in 2018.

Melissa Reagen, Americas Research Head for TH Residential, doesn’t expect any disruption or dramatic shift in the market in 2018, although she does indicate the current demand cycle is in its mature phase. While rents continue to grow in most markets, they are not doing so at the breakneck pace they were earlier in the cycle.

The National Multifamily Housing Council’s October 2017 survey of apartment conditions, meanwhile, points to a fairly sluggish market. But all four indexes (market tightness, sales volume, equity financing and debt financing) are healthier than a year prior, according to the survey.

The market seemed to be at a tipping point as 2017 approached, but for the most part, a plateau or downturn has yet to arrive. The situation is being fiercely monitored across the industry, however.

Here are three of the key questions for 2018 as the new year approaches:

Will supply catch up to demand?

As the apartment market exploded in recent years, developers clamored to maintain pace with demand—but simply couldn’t do it. New developments continued to sprout, but demand remained high. It’s estimated, in fact, that demand approaches 328,000 new apartments per year but current deliveries averaged only 225,000 from 2011-16. Eventually, the new supply will meet or outpace the demand, and it has gotten close in select markets. The good news is that the industry is still trying to figure out ways to increase supply and forecasts that 4.6 million new apartments will be needed by the year 2030.

Are slowly increasing vacancy rates a harbinger of things to come?

Despite the influx of new development, vacancy rates remain low, particularly in the nation’s top six markets. Of those six markets, only Washington, D.C. had a vacancy rate over 3 percent in the second quarter, and the city’s rate sat at a still-low 3.8 percent. The national vacancy rate, meanwhile, rose to 4.5 percent in the third quarter, a slight uptick from the 4.1 percent vacancy rate in Q3 of 2016. It remains to be seen whether the increase is merely a fluctuation or a firm indicator of rising availability.

Will millennials’ increasing propensity to buy homes affect the market?

Homeownership is at its highest level since 2014 and millennials – the darling demographic of the apartment industry – are a primary reason why. As the generation begins to settle down with families, homeownership is back on the table. The Census Bureau reported a 63.9 percent ownership rate in the third quarter, which represents a slow and steady climb and the highest figure in three years. On the bright side for apartment operators, as some millennials begin to trade in their apartment fobs for keys to a new home, Generation Z is beginning to enter the marketplace.

As with last year, 2018 brings with it questions and a bit of uncertainty about the market. But if an overarching message can be gleaned from 2017, it’s not to panic. Proactive approaches will continue to produce results.

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