College towns, energy industry towns, Midwest and Northeast cities dominated rent price increases last month while Sunbelt rent growth that soared during the pandemic succumbed further to a heavy spate of construction.
Twin Texas cities Midland and Odessa led the list of 20 smaller cities Dallas-area apartment software firm RealPage analyzed, posting rent growth of 13.8% last month from a year ago for new apartment leases. The oil drilling cities rival the double-digit rent growth Florida cities were showing in 2021 and into last year. Madison, Wisconsin, home to the University of Wisconsin’s main campus, followed Midland/Odessa with an 8.8% gain.
Rent prices in the smaller markets didn’t rise because of exceedingly strong demand for apartments. They had enough economic activity to fill apartments at a pace that exceeds the supply of existing apartments. None of the markets have substantial pipelines of new apartment construction to staunch rising rents.
“It’s really more of an absence of supply story,” Carl Whitaker, RealPage’s director of research and analysis, said in a web presentation on market conditions last week.
New Haven, Connecticut, had the lowest year-over-year growth among the 20 cities RealPage tracked at 4%. But that topped big markets such as Miami, which had 1.2% growth in September, and Orlando where asking rents dropped 2.4% from a year ago, according to Apartments.com’s latest report. Both cities lead the country in double digit rent growth in late 2021 and into last year.
Apartment rents soared in large Sun Belt markets where job and population growth erupted over the past several years, mostly in Florida, Texas, North Carolina, South Carolina, Tennessee and Georgia. Demand had overwhelmed the supply of existing apartments.
Developers responded with historical levels of new apartment construction, ultimately subduing the blistering pace of Sun Belt rent growth. Demand for apartments fell off last year as renters stayed put worries about the economy.
Overall demand has increased for apartments across the country through this year’s first nine months following the lackluster 2022. Jay Parson, RealPage’s chief economist, said during the presentation that “we’re seeing that people are starting to feel better about the state of the world and their position in it.”
Inflation slowing has been a big factor. The Conference Board’s consumer confidence index hit a two-year high in July, although it has since fallen some because of rising gas prices and cost of groceries.
But the revived demand remains far below the amount of new supply coming after construction hitting historical levels in 2022. Higher interest rates have slowed construction starts. If demand continues rising, it may narrow the gap with supply next year and into 2025.
The Same, But Different
Job growth of some kind has been a factor for many markets across the country, but in varying degrees.
Midland/Odessa has no units under construction. But demand for apartments is there for the time being with oil prices running higher. The oil and gas business brings in jobs when oil prices are high, and the jobs go away when oil prices drop.
“It’s a perfect case study for economics,” Sam Tenenbaum, a Cushman & Wakefield economist based in Austin, Texas, said in an interview. “It’s one of the most volatile rent environments in the country.”
Rent growth was higher in 2018, a time before the pandemic that saw a booming oil and gas business. The pandemic pummeled rents after oil prices plunged.
South Florida pulled in a lot of jobs from the Northeast and Midwest because of the the weather and an environment that is considered friendlier on business taxes as well as no state income tax.
Miami has 31,631 apartment units under construction, or 26% of 120,317 existing units, according to Cushman & Wakefield. Austin, Texas, another strong apartment market, has 41,972 units under construction equal to 15.7% of existing units.
Cushman & Wakefield’s data covers apartment properties that have 50 or more units, which are generally considered investment grade. Other sources include all apartment property under 50 units. Most, if not all, new construction apartments are investment grade.
Higher vacancy typically follows a large construction pipeline. Austin’s vacancy has been rising over more than a year and now sits at about 10% for the third quarter. That has led to asking rents dropping 4.8% year-over-year last month, the biggest decline among the 40 major markets Apartments.com tracks. Miami is up to 6.5% after hitting historic lows during the pandemic.
By comparison, in Madison, brokerage firm Cushman & Wakefield’s latest apartment market report shows 2,593 units under construction, which represents about 4.4% of the existing 57,288 units. Madison has had a modicum of job growth.
Madison’s vacancy is at 3.5% for the third quarter, according to Cushman & Wakefield, rising at a slower pace because of the relative dearth of construction. The metro’s job growth has been trending in a positive direction for several years, shooting higher than pre-pandemic levels in 2021. Unemployment hit a decade low in April at 1.6% but rose to about 3% in August, which was just below the national average of 3.8%.
The city also has the largest campus in the University of Wisconsin system. Fall enrollment this year was 1.3% higher than last year at 50,255 students, which puts pressure on the local apartment inventory.
There’s a shortage of student housing but more private development is coming. Developers have 4,480 beds on the way, putting it seventh in the country for supply, according to Atlanta-based student housing analytics company College House.
Similar dynamics played out in College Station, Texas, home to Texas A&M; Lexington, Kentucky, home to the University of Kentucky; Champaign-Urbana, Illinois, home to the University of Illinois; and Fayetteville, Arkansas, home to the University of Arkansas; and Lincoln, Nebraska.
Auto Manufacturing Job Growth
Beyond the college towns, cities such as Youngstown, Ohio, and Columbus, Georgia, showed rent growth amid jobs coming from auto manufacturing.
General Motors and South Korean company LG opened a battery plan in Warren outside Youngstown in 2022 bring jobs that helped modestly reverse a near decade long slide in jobs. GM had shut its auto plant in the area in 2019 after 53 years, an operation that had dwindled to just a few thousand workers from a height in the 1970s of about 15,000.
Taiwanese electronics maker now owns the plant and plans to being assembling electric vehicles for startup Fisker in 2025. Youngstown hasn’t had many new apartment units in more than a decade, and there’s no construction now.
Rent growth in Columbus, Georgia, about an hour and a half south of Atlanta, was 4.5%. It is getting modest job growth from Hyundai opening a KIA plant along Interstate 85 in 2009 in West Point. Supplies followed to bring more jobs. In July, Hyundai announced a $200 million expansion to build an electric vehicle.
Alpharetta, Georgia-based Imperium Development is building the largest apartment project of three currently underway in the area. Its 300-units are set open next March.
“There’s been no new apartment product built down there” since the Great Recession in 2007-2009, Greg Power, managing principle in Imperium, said in interview. “Now, the next challenge is overcoming municipal infrastructure issues such as sewer.”