A Closer Look at Effective Rent Growth
Both nationally and regionally, the general trend in multifamily effective rents over the last few years has been a steady downward trajectory in growth. The Greater Fort Worth area has been no exception. For a clearer picture of what has been happening, it’s helpful to look beyond market averages and zoom in to the submarket level. To do so, conventional properties of at least 50 units will be used.
It isn’t the case that the market’s overall average rent growth has been affected by one struggling submarket or by one formerly skyrocketing area coming back to earth. In the annual period from January 2017 to January 2018, seven of 12 Greater Fort Worth submarkets managed effective rent gains of more than 5%. In the period from January 2018 to January 2019 half of the submarkets topped 5% growth and none fared worse than the 2.2% rate in Grapevine – Roanoke – Keller. Within the last 12 months, no submarket touched 5% growth and two areas suffered average rent retractions. In other words, rent gains are down across the board, though to varying degrees.
The top-performing regions of Greater Fort Worth in the most recent 12 months were the Denton – Corinth and the South Fort Worth areas – the only two to hit 4% annual growth. Just two years ago, these were areas found toward the bottom of the list for rent growth while submarkets like East Fort Worth and North Arlington were racing to nearly 8% annual gains. No doubt accounting for a portion of this turnaround for Denton – Corinth and South Fort Worth is the uptick in new construction deliveries. Five new properties were introduced in those submarkets in the last year after no new properties were delivered two years ago. And yet, when evaluating average effective rent growth in these areas for only those properties that began the period already stabilized, annual growth was still 3.2% and 3.5% respectively. Both are well above the 2.7% overall annual market gain and the 1.9% annual market gain for stabilized properties.
The two submarkets to suffer average effective rent retractions in the last 12 months were the best performing submarkets in the previous period for rent growth and were the location of a good amount of construction activity in recent months. The Central Fort Worth region delivered seven new properties since January 2019 and yet average effective rent declined by almost 2%. This reality is obscured when looking only at net rent changes that account for collected rent and occupancy together thanks to an 11% annual occupancy gain. However, that gain brought the area only up to 84% average occupancy. North Fort Worth also lost ground in average effective rent, though by a little less than 1%. Here, two new properties were added to the market in the last year. Exacerbating the situation is the simultaneous decrease in average occupancy which is currently down to below 88%.
Rent concessions are certainly not the only headwind affecting rent growth, but they continue to play an increasingly large role in the story. Over the past three years, the Greater Fort Worth market has gone from 15% of conventional properties offering a lease discount to 27% of those properties. The change in the average concession value has been less drastic but has increased nevertheless. The average discount rose from 3% to 5% over the same timeframe, with 5% being equivalent to about 2.5 weeks off of a 12-month lease.
There were three Greater Fort Worth submarkets to end January 2020 with more than one-third of conventional properties offering a concession package, and the list includes some familiar areas. 43% of properties ended the month offering a discount in the Central Fort Worth region, followed by 38% in North Arlington and just over 33% of properties in North Fort Worth. To make matters worse for Central Fort Worth, it also led the market in average value of the discount – nearly doubling the market average of 5% at 9.5% off a 12-month lease.
Other submarkets with large annual changes in the availability of concessions include East Fort Worth and West Fort Worth. In the eastern region, an 84% annual increase in availability ended in 26% of properties offering a lease incentive. In the western region, a 38% annual increase in availability resulted in 30% of properties offering a discount to end January.
Effective rent growth in the Greater Fort Worth market has fallen fairly precipitously in the last three years, even as demand has substantially increased. Average occupancy on a market level has been largely maintained, losing only 1% in that time, but this has come at the expense of rent gains.
It is apparent that new properties at the top of the market are driving a majority of the remaining growth, evidenced by rent growth amongst stabilized properties falling even more substantially than in the market as a whole. Despite this, even submarkets with a high volume of new deliveries haven’t been immune to lackluster rent growth, Exhibit A is Central Fort Worth. With substantially more new units due to be delivered in the next year or two than have been delivered in recent years it is unlikely that even a continuation of the trend in demand growth will be sufficient to offset this new supply and pressure rents while maintaining occupancy.