NEW YORK CITY—Even as multifamily remains the strongest commercial property sector by a variety of metrics, including investment sales volume, analysts are expecting deceleration in rent growth and, with that, in revenue growth as well. At Reis Inc., for example, chief economist Victor Calanog sums up a 10-basis point third-quarter uptick in nationwide vacancies and “paltry” asking and effective rent growth of 1% and 0.9%, respectively, by reiterating what he'd said in August: “expect a moderation in rent growth” as the market absorbs new supply.

Similarly, although Fitch Ratings notes that the apartment market remains strong and that “demographics continue to favor the multifamily sector,” the ratings agency sees a peak approaching. Accordingly, Fitch says it expects to cap revenues for this year at 2016 levels.

Partly that's due to a continued robust delivery pipeline, which Fitch links to an expected uptick in vacancies. Citing Reis data, Fitch notes that 258,000 apartment unit are expected to come on line by the end of this year. “That's a number that we haven't seen at the national level since the late 1980s,” Calanog writes.

Thirty-one percent of those new apartments will be delivered in the South Atlantic, followed by 25% in the West and 19% in the South West. The Northeast and Midwest will round it out with 14% and 12%, respectively, of the tallies.

“This year, and next year, are going to be banner years for supply growth,” writes Calanog. “While we expect renter demand to continue to remain robust, we are predicting vacancies to rise given the amount of new projects that are coming on line.”

He adds that the steep drop-off in supply growth expected for 2019 is “something to be hopeful about. A lot of lenders and sources of finance have in fact pulled back on greenlighting multifamily construction, a process which began last year.”

For projects that have already broken ground, “the train has left the station,” Calanog writes. “The next 18 months will represent “a time of reckoning for markets like New York, where it is expected that a record number of new properties – over 15,000 units, not counting condos and townhomes – will come on line,” he adds. Fitch cites New York, as well as Nashville, Denver and Washington, DC as markets to watch given a concentration of new supply.

Green Street Advisors' Cedrik Lachance came away from Nareit's REITWorld conference last week with a muted 2018 outlook for apartment REITs—a view derived largely from meetings with the investment trusts' senior executives. Initial rent growth guidance for next year from Mid-America Apartments and discussions with other management teams at REITWorld “indicate general agreement with our outlook for decelerating revenue growth in '18,” he writes in a report recapping Green Street analysts' takeaways from the three-day conference.

At REITWorld, “Management teams seemed intent to set a somewhat cautious tone and rein in any expectations for a top-line reacceleration in '18, which is a notable shift in tone from earlier in '17,” Lachance writes. He adds, though, that “executives are confident that even if new lease rent growth remains weak, steady renewal lease pricing power will support revenue growth to a degree, as the inertia associated with moving continues to surprise favorably. We continue to expect low-2% top line growth next year for apartment REITs.”

Instant Insights /

Vacancy Uptick Seen as Apt. Deliveries Continue

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