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Econometric Advisors
APARTMENT OVERVIEW AND OUTLOOKQ4 2017
2 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
STRONG CONSUMPTION, HIGHER PRIVATE INVESTMENT AND THE NEW TAX PLAN ARE EXPECTED TO DRIVE GROWTH, BUT EMPLOYMENT GROWTH IS SLOWING• In January, monthly job growth’s trailing 12-month average was down to 176,000 jobs from January 2017’s 208,000.
Hurricane impacts affected certain service sectors, but the broader slowdown has been driven by a tight labor market.
• With firms competing to hire workers from a shrinking talent pool, January registered the strongest wage growth in nine years. Wage growth may continue to quicken if the unemployment rate continues to decline.
THE OUTLOOK FOR 2018 IS STRONGER THANKS TO PASSAGE OF TAX BILL• Federal tax reform will stimulate the economy in the medium term, while also straining the government’s already weak
fiscal position.
• With the U.S. economy’s negative output gap having closed, the new tax cuts are likely to raise inflation. Along with an increasingly tight labor market, this may make the Fed more hawkish, prompting further rate increases that could tighten financial conditions later in the year and lead to lower growth in 2019.
• We’ve revised our baseline forecast for 2018 GDP growth upward 20 bps—to 2.6%. Our upside and downside forecast scenarios, while reflecting a wider range of outcomes and policy uncertainty, remain unchanged from last quarter.
THE U.S. ECONOMY WILL REMAIN ON FIRM FOOTING IN 2018JOB GROWTH WILL MODERATE AS LABOR MARKET TIGHTENS FURTHER
3 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
LABOR MARKET TIGHTENS, WAGE GROWTH STILL STRONGEMPLOYMENT GROWTH, YOY (%)
Source: CBRE Econometric Advisors, Q4 2017.
• The unemployment rate fell from 4.2% to 4.1% QOQ; the labor force participation rate remained stable, MOM, at 62.7%.
• Low unemployment is making it difficult to find qualified workers, however, which is slowing the trend in employment growth.
• Wage growth is healthy; January’s YOY rate of 2.9% is the highest of the current cycle.
• Further wage growth will benefit renters and landlords alike by improving affordability. Rent growth has slowed more in markets with low affordability—especially in Class A.
• Expect both slowly rising wage growth and slowing employment growth to continue.
WAGE GROWTH, YOY (%)
(6)
(4)
(2)
0
2
4
Mar-0
8
Mar-0
9
Mar-1
0
Mar-1
1
Mar-1
2
Mar-1
3
Mar-1
4
Mar-1
5
Mar-1
6
Mar-1
7
Total Nonfarm
1.5
2
2.5
3
Mar-1
4
Jul-1
4
Nov-1
4
Mar-1
5
Jul-1
5
Nov-1
5
Mar-1
6
Jul-1
6
Nov-1
6
Mar-1
7
Jul-1
7
Nov-1
7
All Private
4 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
HOMEOWNERSHIP RATE MOVES UP SLIGHTLY IN Q4 2017
Source: U.S. Bureau of the Census, CBRE Econometric Advisors, Q4 2017.
U.S. HOMEOWNERSHIP RATE (Q1 1997-Q4 2017)• The homeownership rate has steadily declined since its Q4 2004 peak of 69.2%; in Q4 2017 it was 64.2%.
• The Q2 2016 rate (62.9%) was a 20-year low; it has since risen 130 bps and looks to have stabilized.
• The Q4 2017 rate (64.2%) was up 50 bps YOY; its movement over the past two years has been mostly sideways.
• With the rate so far below its 20-year average (66.7%), some continued mean reversion is very likely.
• Even if homeownership preferences by age cohort don’t change, the aging population will slowly push the ownership rate modestly higher. 62
63
64
65
66
67
68
69
70
Q1 19
97Q4
1997
Q3 19
98Q2
1999
Q1 20
00Q4
2000
Q3 20
01Q2
2002
Q1 20
03Q4
2003
Q3 20
04Q2
2005
Q1 20
06Q4
2006
Q3 20
07Q2
2008
Q1 20
09Q4
2009
Q3 20
10Q2
2011
Q1 20
12Q4
2012
Q3 20
13Q2
2014
Q1 20
15Q4
2015
Q3 20
16Q2
2017
(%) Homeownership Rate 20 Yr. Avg.
5 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
LONG-TERM RATES HAVE FOLLOWED INFLATION EXPECTATIONS LOWER
10-YEAR TREASURY RATE (%)
Source: Board of Governors of the Federal Reserve System, CBRE Econometric Advisors, Q4 2017.
• From October 2016 to March 2017, the 10-year rose 125 bps—from 1.37% to 2.62%. The increase was comparable to the 135-bps run-up during the “taper tantrum” of 2013 (1.66% to 3.01%).
• The 10-year Treasury has since remained between 2.0% and 2.7%.
• The 10-year yield recently moved to a multiyear high due to the passing of a tax bill that will likely boost growth and inflation.
• Still, that movement was fairly minimal, bringing the yield in line with post-election levels—implying that growth and inflation expectations haven’t changed much.
• The unwinding of the Fed balance sheet will likely put some upward pressure on longer-term rates. 1.0
1.5
2.0
2.5
3.0
3.5
2013
2014
2015
2016
2017
2018
U.S. apartment absorption remained robust through Q4 2017; supply still outstripped
demand slightly, despite weather and labor shortage-
related delays.
7 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
PEAK COMPLETIONS IN 2018
Source: Axiometrics Inc., CBRE Econometric Advisors, Q4 2017.
STATE OF THE APARTMENT MARKET
• The Sum of Markets vacancy rate rose 10 bps, YOY, to 4.9%.
• For the past five years, fourth-quarter vacancy rates have trended between 4.6% and 5.1%.
• Strong completions (4-qtr sum: 265,865) led to the marginal increase in vacancy.
• Robust absorption (4-qtr sum: 241,233) was at its highest since 2010. Absorption is expected to hit a new high in 2018.
• Strong demand will help to moderate vacancy through 2018; our models predict a modest 20-bps rise in vacancy during that time. 3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
(100,000)
0
100,000
200,000
300,000
400,000
500,000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Completions Net Absorption Vacancy
Forecast
VACANCY RATE (%)NET ABSORPTION, COMPLETIONS (UNITS)
8 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
SUPPLY TRENDS: SOME MARKETS SHOWING MORE RISK
Source: CBRE Econometric Advisors, Q4 2017.
ANNUAL STOCK GROWTH (%) • For the Sum of Markets, the past year’s supply growth (1.8%) exceeds the long-run average (1.1%).
• Although the same holds for many individual markets, supply growth has trended down in those with the largest supply pipelines.
• The growth of supply is weighing on rent growth and will likely continue through H1 2018.
• Even with new deliveries, continued strong employment growth and subsequent net absorption will help many of these markets outperform the Sum of Markets.
• Rent growth will continue to hold up well in large, non-gateway markets.
4.7 4.54.2 4.1
3.6 3.5 3.4 3.3 3.33.0 2.9 2.9 2.8 2.7 2.7 2.6 2.5 2.3 2.2 2.2
1.8
0.0
1.0
2.0
3.0
4.0
5.0
6.0
San A
ntonio
Green
ville
Austi
n
Nash
ville
Charl
otte
Salt L
ake C
ity
Denv
er
West
Palm
Beac
h
Orlan
do
Seatt
le
Kans
as Ci
ty
Ralei
gh
Colum
bus
Memp
his
Portla
nd
Dalla
s
Lexin
gton
Fort L
aude
rdale
Minn
eapo
lis
Tulsa
Sum
of Ma
rkets
Last 12 Months Long-Run Average
9 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
DEMAND IS STRONG IN SECONDARY MARKETS
Source: CBRE Econometric Advisors, Q4 2017.
• Markets that have posted strong absorption figures over the past year are scattered across the U.S. and include Austin, Nashville, Orlando, Denver and Pittsburgh.
• The common thread: most of these markets are smaller secondary markets where renting is generally more affordable.
• Of the past year’s top 20 absorption markets, only Houston is in the top 10 by inventory size.
• In just one gateway market has demand outpaced the Sum of Markets: Washington, D.C.
• Expect secondary markets to outpace gateway markets in demand growth over the near term.
4-QTR NET ABSORPTION AS A PERCENT OF CURRENT INVENTORY—TOP 20 MARKETS
3.63.5 3.4 3.4 3.3
3.1 3.1 3.0 3.02.9
2.72.5
2.4 2.3 2.3 2.3 2.3 2.3 2.2 2.2
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Green
ville
Orlan
do
Austi
n
Denv
er
Hous
ton
San A
ntonio
Nash
ville
Salt L
ake C
ity
El Pa
so
Charl
otte
Colum
bus
Kans
as Ci
ty
Portla
nd
Memp
his
West
Palm
Bea
ch
Norfo
lk
Las V
egas
Pittsb
urgh
Tamp
a
Ralei
gh
(%)
Sum of Markets: 1.6 %
10 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
FEWER MARKET POSTED VACANCY DECLINES IN Q4 2017
Source: Axiometrics Inc., CBRE Econometric Advisors, Q4 2017.
• Sum of Markets YOY vacancy rate: 4.9%(up 10 bps from 4.8%).
• Vacancy rates declined in 21 markets, YOY. It increased in 36 and for the Sum of Markets. Six markets registered no change.
• The greatest vacancy rate increases are occurring in markets where supply growth is strong (Nashville, San Antonio, Seattle) and/or markets where economic factors have slowed demand growth (St. Louis, Cleveland).
• In the markets where vacancy rates continue to decline, most of the tightening is due to a lack of completions and not necessarily to spikes in net absorption—although there are a few exceptions.
CHANGES IN VACANCY, TOP & BOTTOM TEN (PAST 4 QUARTERS, BPS)
-180-170
-110-90
-50-40-40-40-40
-307070
80808080
9090
100120
(200) (150) (100) (50) 0 50 100 150
HoustonEl Paso
PittsburghRichmond
JacksonvilleOrlando
ProvidenceRiverside
TucsonHartfordSeattle
TulsaChicago
Fort WorthNashville
West Palm BeachClevelandSt. LouisLouisville
San Antonio
Sum of Markets: +10 bps
11 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
STRONG NUMBERS FROM MANY OF THE 20 LARGEST MARKETS
Source: CBRE Econometric Advisors, Q4 2017.
NOMINAL RENT GROWTH (YOY, %)• Sum of Markets (SoM) YOY rent growth: -0.3%.
• 14 of the 20 largest markets nevertheless recorded positive nominal rent growth, YOY. Phoenix topped the list with 3.6%.
• New York was the laggard among the large markets, with a YOY change of -4.7%.
• If we remove New York, which accounts for 13.1% of our SoM inventory, from the SoMcalculation, rent growth was 1.1%—a figure more in line with most markets’ results over the past year.
• For most major markets, rent growth will remain above the SoM average over the next four quarters. The number of markets posting positive YOY rent growth went unchanged from Q3 2017.
Sum of Markets: -0.3
(6)
(5)
(4)
(3)
(2)
(1)
0
1
2
3
4
Phoe
nix
Denv
er
Atlan
ta
Baltim
ore
Hous
ton
Tamp
a
San D
iego
San F
rancis
co
Dalla
s
Seatt
le
Wash
ington
, DC
Detro
it
Los A
ngele
s
Minn
eapo
lis
Miam
i
Sum
Of M
arkets
Bosto
n
Phila
delph
ia
Oran
ge Co
unty
Chica
go
New
York
12 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
RENT GROWTH TO OUTPERFORM IN SMALL & COASTAL MARKETS
TWO-YEAR BASELINE FORECAST: ANNUAL NOMINAL RENT GROWTH (%)• Sum of Markets annual rent growth of -0.5% is forecast for the next two years. This is due in part to our call for a mild recession in late 2019 and early 2020.
• Secondary and tertiary markets dominate the rent growth forecast; just three of the 20 largest markets are among the top 20 for two-year forecast rent growth.
• Tampa leads the major markets, with annual growth of 2.0% forecast.
• Ten of the top 20 markets for forecast rent growth are in California (5) or Florida (5).
• Our baseline outlook favors markets with weaker supply growth and stronger growth in professional services employment.
3.6 3.53.2
2.7 2.62.2 2.2 2.0 2.0 1.9 1.9 1.8 1.8 1.8 1.8 1.6 1.6 1.5 1.3 1.3
-0.5
(2)
(1)
1
2
3
4
5
Newa
rk
Long
Islan
d
Orlan
do
Jacks
onvil
le
Oakla
nd
Richm
ond
Sacra
mento
Tamp
a
Colum
bus
Hous
ton
Ventu
ra
West
Palm
Beac
h
Hono
lulu
Norfo
lk
Fort L
aude
rdale
Indian
apoli
s
San D
iego
Tucso
n
Rivers
ide
Cleve
land
Sum
Of M
arkets
13 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
RENT GROWTH CONTINUES TO LAG IN TIER 1 MARKETS
Source: Axiometrics Inc., CBRE Econometric Advisors, Q4 2017.*Market tiers based on market classifications from the CBRE Cap Rate Survey
• YOY rent growth:Tier I markets: -1.2% Tier II markets: 2.0%Tier III markets: 1.2%
• Tier II and III rent growth tends to outperform during the later stages of the business cycle.
• CBRE EA forecasts slowing rent growth across Tier I markets as a whole over the next eight quarters.
• Investment volumes by metro somewhat reflect rent growth trends by market tier. The largest markets—where rent growth is often weakest—have recorded YOY declines in investment volume, while volume has held up or accelerated in smaller markets.
CHANGES IN RENT GROWTH BY MARKET TIER*
-10
-8
-6
-4
-2
0
2
4
6
8
2004
.420
05.2
2005
.420
06.2
2006
.420
07.2
2007
.420
08.2
2008
.420
09.2
2009
.420
10.2
2010
.420
11.2
2011
.420
12.2
2012
.420
13.2
2013
.420
14.2
2014
.420
15.2
2015
.420
16.2
2016
.420
17.2
2017
.4
Tier I Tier II Tier III
14 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
NO Q4 SPIKE BUT VOLUME REMAINS STRONG TO END THE YEARQ3 VOLUME FLAT, YEAR OVER YEAR
Source: Real Capital Analytics, CBRE Econometric Advisors, Q4 2017.
• Cap rates were flat in Q4 2017, QOQ, and down 10 bps, YOY.
• Cap rates are now 60 bps below their pre-recession lows.
• 2017 investment volume was down 6.9%, YOY—to $147.0 billion from $157.8 billion.
• Q4 2017 volume was down 8.3%, YOY.
• Increases in short- and long-term interest rates during Q4 2016 and Q1 2017 contributed to the lower Q1 volume, impacting the 2017 total.
• The recent growth in investment volumes can be partially attributed to the surprisingly robust net absorption that is keeping vacancy rates fairly stable as completions continue to rise across markets.
• Global growth and tax cuts should act as tailwinds for volume in 2018.
4
5
6
7
8
9
0
10
20
30
40
50
60
Q1 20
03
Q4 20
03
Q3 20
04
Q2 20
05
Q1 20
06
Q4 20
06
Q3 20
07
Q2 20
08
Q1 20
09
Q4 20
09
Q3 20
10
Q2 20
11
Q1 20
12
Q4 20
12
Q3 20
13
Q2 20
14
Q1 20
15
Q4 20
15
Q3 20
16
Q2 20
17
Transaction Volume Average Cap Rate
TRANSACTION VOLUME ($, BILLIONS) CAP RATE (%)
15 Q4 2017 | APARTMENT OVERVIEW AND OUTLOOKCBRE ECONOMETRIC ADVISORS
SUBURBAN
METRO TIER
All I II III
4.96 4.67 5.00 5.52
5.49 5.15 5.58 6.05
6.32 5.95 6.25 7.17
Class A
Class B
Class C
INFILL
METRO TIER
All I II III
4.67 4.40 4.70 5.42
5.15 4.80 5.24 6.03
5.91 5.45 5.87 7.25
Class A
Class B
Class C
INFILL
METRO TIER
All I II III
-1 4 -6 -10
0 8 -15 0
-9 -6 -17 -8
SUBURBAN
METRO TIER
All I II III
-7 -1 -15 -7
-6 2 -16 -6
-9 -2 -15 -13
Change vs H1 2017 (BPS)
AverageRate (%)
Source: CBRE Research, CBRE Capital Markets, H2 2017.
CAP RATES—U.S. MULTIFAMILYRATE COMPRESSION CONTINUED IN TIER II AND TIER III MARKETS DURING H2 2017
Copyright (C) 2018, CBRE Econometric Advisors (CBRE EA). All rights reserved. Metropolitan employment forecasts are copyrighted by Moody’s Economy.com. Sources of information utilized in this report include CBRE, CoStar, Moody’s Economy.com, and CBRE EA. The information presented has been obtained from sources believed to be reliable but its accuracy, and that of the opinions and forecasts based thereon, is not guaranteed. All opinions, assumptions and estimates constitute CBRE EA’s judgment as of the date of the release and are subject to change without notice. The information and material contained within this product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or real estate assets. This product does not take into account the investment objectives or financial situation of any particular person or institution.
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Matt VanceEconomist | Director, Research and Analysis+1 303 628 [email protected]
Maximilan SaiaEconomist+1 213 613 [email protected]