The US apartment market has been making headlines of late. After peaking in 2015 with rent growth in excess of 5% and occupancies tightening to above 95%, recent data is starting to show some weakness as large waves of new supply hit the market.
The US has seen spikes in apartment construction in the 70’s, 80’s and 00’s, however there is a key difference in this cycle: developers are focused on building in urban cores. The thinking that urban areas provide barriers to entry for developing is antiquated. Instead, cities like Nashville, Austin, and Denver are fully embracing the live/work/play model to boost their local economies. Major markets like New York and San Francisco have also seen a large increase in new supply.
The impact of this new supply is starting to emerge with rent growth slowing to around 4% for the year ending June 30, 2016. Headwinds will persist because of the following reasons:
Sources: Axiometrics Inc., BLS (from Axiometrics Apartment Market Outlook for 2016)
Will rent growth ultimately recede below the historic trend of ~2%? Unlikely, due to a confluence of sustaining factors outlined below:
Multifamily Construction as a % of GDP
Source: Credit Suisse CMBS Market Watch 2016 Year Ahead Outlook
To sum it up, fundamentals are stable but certain segments of the apartment sector are vulnerable. The abundance of new supply could cause rent growth to rapidly deteriorate if the US economy stalls. A more likely scenario is slightly weaker apartment fundamentals over the next few years as the new supply is absorbed and the US economy continues its tepid expansion. Rent growth should continue to decelerate but will likely remain modestly above trend because segments of the market where supply has been limited (e.g. suburban and Class B/C properties) will bolster the otherwise anemic rent growth that will be experienced in Class A urban markets.
 Source: Axiometrics
 30% of annual income
 Per CoStar historic rent growth has been 2.2%
 Source: US Census Bureau
 Source: PEW Research Center
 Source: CoStar
 Per REIS the total market in 2015 was approximately 10.4 million units