The expansion of the U.S. apartment market over the past seven years has been largely concentrated in metro areas and, more specifically, within the urban cores of these metros. This trend is due to growth in both supply and demand in multifamily housing, as millennial renters prefer to live close to work and job growth also has been centered in urban cores.
Indeed, the chart on this page shows that developers have built far more apartments in central business district (CBD) submarkets over the past seven years than in suburban markets, and occupancy rates have followed suit. Note how inventory growth in CBDs exceeded the associated occupancy growth, which pushed up the vacancy rates in 2017 and 2018. The vacancy rate across all CBD submarkets was 6.9 percent at the end of 2018, up from 5.9 percent at the end of 2016. Conversely, the vacancy rate in suburban submarkets averaged 4.8 percent at the end of 2018, up from 4.2 percent at the end of 2016.
The chart also shows how rent growth in CBD submarkets was consistently higher at the start of the expansion, but the CBD premium narrowed over the past three years as higher supply growth kept a lid on rents in many of these submarkets.
The story of apartment-inventory growth in CBDs outpacing that of their suburban-market counterparts has been repeated across this timeline. Likewise, a narrowing gap between CBD and suburban rent growth is not a surprise. But a look at the metro-level data shows that not every metro has followed this trend.
Some metros showed consistently higher suburban rent growth over the past five years, including Baltimore; Greenville, South Carolina; Jacksonville, Florida; Little Rock, Arkansas; Omaha, Nebraska; and Tucson, Arizona, as well as many larger West Coast metro areas such as the California cities of San Diego, San Jose and Sacramento; Portland, Oregon; and Seattle.
A number of other markets saw very little difference between CBD and suburban rent growth over the past five years, including Boston; Austin, Texas; Denver; Houston; and Tampa, Florida. Still, there are markets that saw higher gaps between CBD and suburban rent growth, such as Los Angeles, Atlanta, New Orleans, Philadelphia, Chicago, the Ohio cities of Cincinnati and Columbus, and the Florida cities of Miami and Fort Lauderdale.
The people who know these markets may not be surprised by these findings. That said, the diversity of these markets suggests that there is no clear explanation as to why some CBDs have outpaced their suburban neighbors while others have not.
Indeed, a number of Midwest markets that had higher CBD rent growth relative to suburban growth over the past five years saw a reversal in that trend over the past year. These include Milwaukee, Minneapolis and Columbus, Ohio. At the same time, a couple California metros saw relatively higher CBD growth than suburban growth in 2018 compared to previous years, including San Bernardino/Riverside and San Francisco.
In short, these trends generally move with the overall balance between supply and demand growth in both their respective CBD and suburban markets.
As CBD submarkets look to add disproportionately more apartment-inventory growth in 2019 compared to suburban submarkets — which is consistent with prior years — we should expect to see higher vacancy rates in a number of CBD submarkets, but the subsequent impact on rent growth may not be as predictable as one might think.