2013 is shaping up to be a very good year for Jacksonville
apartment properties. As discussed in previous posts: vacancies are down,
effective rents are up, and operating expenses are under control. Let the good
times roll! But, will they roll into 2014?
That obviously
depends on what is going to happen with the drivers that have created those
good times. From previous posts, you know that an improving employment picture
has increased household incomes and thus released pent-up household formation (see Figure 1). After
a hiccup in household income growth in 2013Q1, incomes resumed growing in
2013Q2 giving consumers the confidence to begin forming new households at a
pace exceeding population growth. Both resurgent job and resulting income growth
in 2013Q3 fired up the household formation rate while population growth
remained steady.
Figure 1: Jacksonville Apartment Market Drivers |
The combined rising
household formation rate and household incomes had two positive benefits for
landlords (see Figure 2). Rising household formation created the demand for housing units that
brought vacancies to a level 150 BPS below Jacksonville’s ten-year average
vacancy rate. That demand level allowed landlords to raise effective rents in pace with rising average household incomes (see Figure 2 Effective
Rent as a percent of Average Household Income). Given relatively stable operating expenses, improved
revenue could go to straight to NOI.
Figure 2: Jacksonville Apartment Market Rents and Vacancy |
However, that entire revenue enhancement occurred in an inventory-constrained environment. From 2010 through 2013Q3 new apartment inventory completions were minimal relative to demand (see Figure 3). Starting in 2013Q4 and continuing into 2014 the supply situation will change dramatically. In 2013Q4 570 units should be completed, doubling the completions for 2013 to date and more than double the combined completions in 2011 and 2012. REIS projects that 1,708 units will be completed in 2014, 50% more than the number of units completed in 2013.
Figure 3: Jacksonville Apartment Market Net Absorption |
So what will happen in 2014? That brings us back to the
demand drivers: employment growth resulting in rising household incomes fueling
household formation and rent paying capacity. The On Numbers Economic Index
produced for American City Business Journals is an index designed to show the relative economic
strength of the 102 major metros with estimated populations exceeding 500,000.
As reported by the Jacksonville Business Journal, in January 2013
Jacksonville ranked 98th rising to 16th in September; but
falling back to 42nd by November. That still suggests a relatively
strong local economy. The Local Economic Indicators Project (LEIP) at the
University of North Florida produces a Local Leading Economic Indicator
Index for Jacksonville: it has risen from 111.08 for January 2013 to 114.09
as of October, although they expect it to decline slightly going into the new year. Nevertheless, LEIP expects Jacksonville to outperform the national economy, At this time it is therefore reasonable to expect sufficient
demand to maintain vacancies and effective rents at current levels even with new
completions increasing the inventory (i.e., forgetting for the moment all the
exogenous potential disruptions like the federal budget deficit, Obamacare, war
in the Middle East or with China, etc.).
Reinforcing sustained demand for apartments, there are
mitigating forces to any decline in employment growth. Apartment absorption has
been a declining percentage of new household formation (see Figure 3). Any
decline in employment growth with a resulting decline in household incomes
would direct demand towards apartments from home purchases. Also, home
ownership affordability is declining as evidenced by the NAHB/Wells Fargo
Housing Opportunity Index and the National Association of Realtors First
Time Homebuyers Affordability Index for existing homes.
Thus, strong apartment operating fundamentals should
continue, but not improve, into 2014 even with the increased inventory hitting
the market. HOWEVER, there is a caveat for existing properties. It will be a
much more competitive market in 2014. You can no longer sit back and count on
rising household formation and incomes to fill units and raise rents. Older
properties need to be fresh and targeted to their specific market to compete as
competitors seeking to maintain their occupancy in the face of increased
competition pursue existing residents.
If you would like to discuss these thoughts in more
detail, please contact me:
Paul B. Hazlett
Multifamily Investment Advisor
Coldwell Banker Commercial - Benchmark
904.421.8523
PHazlett@CBCBenchmark.com
Multifamily Investment Advisor
Coldwell Banker Commercial - Benchmark
904.421.8523
PHazlett@CBCBenchmark.com
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