The Inside Look with Xander Snyder - Episode 8

In this episode of ‘The Inside Look,’ Senior Commercial Real Estate Economist Xander Snyder discusses the influence of new excess stock on rent growth.

Hi, I'm Xander Snyder, and this is First American's Inside Look.

If you're looking to rent an apartment or own an apartment building, chances are you're curious to know what's going to happen to rent growth over the course of the next year. A lot of this will be determined by how much new supply comes to market in your city.

According to the latest new residential construction report, there remains a near all-time high number of apartments under construction across the country, nearly a million units. However, that construction varies considerably by geography. Where there is more new supply, renters have more choices, which forces landlords to compete by lowering the rent.

However, supply isn't the only determinant of rent growth. For example, if in some city, there is sufficient demand to lease up all of those new apartments coming to market, then rents are less likely to fall. Now it turns out there is a convenient way to combine supply and demand into a single measure. To understand which cities face excess and which face scarcity, and therefore, which are more likely to see rent growth either fall or increase over the course of the next year.

Deliveries is an easy enough measure of supply: it's just the total number of units brought to market in some city. So, what about demand? Well, one way to measure demand is to count up all the number of apartments that were leased in some time period and then subtract the number of vacated units in that same time period. That leaves you with a measure that's commonly referred to as net absorption, which is the total change in leased apartments.

If we take net absorption, our demand measure, and subtract it from deliveries, our supply measure, what's left over is the new excess stock of apartments. When new excess stock is positive, it indicates that demand is not high enough to offset the new supply of apartments. When new excess stock is negative, it means that there is more demand than there is supply.

So where are rents rising, where are they falling, and how is that related to new excess stock? Take a look at this chart. This chart shows the relationship between new excess stock, which is our combined supply and demand measure, and rent growth. New excess stock runs along the horizontal axis and annual rent growth along the vertical axis. The two dark gray grid lines indicate the average value for both new excess stock and annual rent growth. The cities shown here are the largest 75 by population, and the size of each bubble indicates how large each city is. Lastly, the color of the bubble indicates which region that city is in.

Now, as you can see, there's a clear negative relationship between new excess stock and rent growth. That is, cities that have had a lot of apartments come to market relative to demand have typically had negative rent growth, or at least below average rent growth. In the lower right quadrant, you see a lot of Sunbelt, Southeast and Southwest cities that have had a lot of new supply come to market over the last year that's exceeded demand, which has led to below average rent growth. In the upper left quadrant, you see a lot of Midwest and Northeastern cities. These are locations that have had below average new excess stock and, as a result, have had moderate positive rental growth.

If you're interested in playing around with this chart, we have a fully interactive version where you can hover over your city and see exactly how it's performing compared to others. We've included a link to this interactive version of the chart in the show notes of this video.

I'll be in Phoenix in mid-May to give a talk about the commercial real estate adjustment that we're in right now and for how much longer it might go on for. If you are interested in attending, please reach out to your local First American representative.