2014Q1 Jacksonville Apartment Market Review: Is the Jacksonville Apartment Market Facing Oversupply?

The Jacksonville apartment market bottomed in 2010 after the Great Recession with asking rents falling 1.1% from 2009 levels after a reaching a 2009 vacancy rate of 14.4%. Asking rents as of 2014Q1 are up 5.2% from 2009, but more importantly vacancies are down to 6.3%. With 1,428 new apartment units completed in 2013 and added to the Jacksonville inventory, many observers have wondered if the Jacksonville apartment market is headed towards another oversupply situation. They worry that the additional 2,247 units forecasted for completion in 2014 will aggravate the situation. So are we headed to an oversupply situation that will adversely affect rents and occupancy?

Demand Drivers

To assess the condition of the market we first need to look at the factors that drive apartment market demand (Figure 1).

Figure 1

Population growth is the basic fuel for housing demand. During the years preceding the Great Recession, Jacksonville’s population was growing at 2%+ per year based on a booming economy. In the aftermath of the Great Recession the population growth rate has been cut in half.

Employment growth impacts population growth by attracting in-migration. Jacksonville MSA employment bottomed in 2009 at 577,170 jobs, down 51,900 jobs from the pre-recession high of 629,070 jobs in 2007. Jacksonville has recovered 42,790 of those jobs as of 2014Q1 for a cumulative employment growth of 7.4% versus population growth over the same period of 4.1%. Most of the employment growth occurred in 2013. According to the U.S. Bureau of Labor Statistics as of the end of 2014Q1, the Jacksonville MSA unemployment rate was 6.1% versus the Florida rate of 6.3% and the national rate of 6.7%. The improving labor market has not yet resulted in a faster growing population, but it takes time for that information to be spread in the national economy.

Nonetheless, the improving employment picture has generated much improved household incomes. On the employment gains of 7.4% since 2009, household incomes have risen 12.0% as of 2014Q1. In addition to population growth, household incomes are an important driver because they determine the capacity of the population to form new households and to pay increasing rents. Historically household formations have exceeded the population growth rate, but during the Great Recession they declined only equaling population growth. Household formations again started pulling ahead of population growth in 2013 based on more confidence in jobs and growing household incomes, reflecting the pent-up demand for housing suppressed during the Great Recession. Households have increased 4.6% since 2009 on the 4.1% population increase.

So demand is strong, but not as strong as it might be. Will the demand continue and the potential be realized going forward? I think it will. Key to achieving that outcome will be continued employment growth and resulting household income improvements. The UNF Local Economic Indicator Project produces a Leading Economic Indicators Index for Jacksonville (Coldwell Banker Commercial Benchmark is a sponsor of LEIP Jax). That index stood at 115.13 as of 2014Q1, up from 110.21 as of 2012Q4 when employment gains really began in Jacksonville and 108.28 at 2009Q4 when the apartment market bottomed. The Jacksonville economy in 2014 should be conducive to rising household formation and therefore rising housing demand.

Supply and Absorption

Of course, demand must be examined in the context of supply (Figure 2). 

Figure 2

During 2013, 1,428 units were added to the Jacksonville apartment inventory. An additional 2,247 units are forecasted to be added during 2014. These may seem like large numbers, but for some perspective:

·         From 2010 to 2012 a total of only 1,202 units were added to inventory while there were 16,060 households formed; and

·         From 2010 to 2014 it is expected that a total of 4,877 units will be added to inventory in a growing economy, whereas in the preceding 5-year period of 2005 to 2009 7,923 units were added to a declining economy (the experience that I think creates the worries about oversupply).

Apartments are not the only product available to satisfy housing demand. Substitute products include, amongst others, home ownership and single-family home rentals. Apartment absorption satisfied almost half of the demand from new household formations in 2010; the intensifying foreclosure crisis combined with very difficult mortgage qualifications left apartment rentals as one of few housing alternatives then available. Jacksonville was hard hit by foreclosures, and that foreclosure crisis created single-family rental options into 2011 through 2013. At the same time home ownership became a more available option with relatively low home prices and very low interest rates. Those factors combined to push apartment absorption down to about a quarter of new household formations by 2013, a very low level by historical standards. Both of those circumstances are reversing in 2014. As the foreclosure crisis winds down, fewer foreclosed homes mean fewer conversions of single-family homes to rentals. Also, and more importantly, home ownership affordability is declining: the National Association of Realtors national First-Time Homebuyer Affordability Index declined from 129.7 for 2012 to 116.0 for 2013, and the National Association of Home Builders Housing Opportunity Index for Jacksonville declined from 85.2 at 2012Q4 to 79.0 at 2013Q4.

Oversupply should not have a major deleterious effect on the overall Jacksonville apartment market for the foreseeable future. Housing demand will continue to rise based on a growing Jacksonville economy. Housing product substitution will favor apartments. Even if the economy does not grow as rapidly as expected, any impact of slower household formation will be mitigated by the resulting necessity to rent apartments versus other housing alternatives.

The more interesting question is how the inventory increases will affect the various property classes and submarkets in Jacksonville. All of the inventory additions are Class A properties, and almost all are in the southeast quadrant of Jacksonville. We will address this question in my next post.

Operating Results

Demand and supply interact to produce the operating results in the market (Figure 3).

Figure 3

It is clear that demand exists for new apartment units. Vacancies in 2013Q4 were down 70 BPS from 2012Q4 even with the completion of 1,428 new units. None of the anticipated 2014 completions occurred in Q1and the 2014Q1 vacancy rate declined an additional 40 BPS from 2013Q4 to 6.3%. The vacancy rate has not been that low since the early 2000’s when condo conversions removed over 8,000 apartment units from the Jacksonville market. While I do not expect the vacancy rate to continue to decline with the new completions hitting the market, neither do I expect it will rise significantly because sufficient demand exists.

However some pressure on rents was seen in 2014Q1 with asking rents increasing by only 20 BPS and effective rents, by 30 BPS. Both asking and effective rent increases are down from 100 BPS increases in 2013Q4 and 120 BPS increases in 2013Q3. Average asking rents in Jacksonville were $847 per unit in 2014Q1, and effective rents were $816.

Jacksonville landlords have followed a strategy over the last five years of having rents follow incomes, as shown in Figure 3. The effect has been to significantly improve occupancy by maintaining affordable rents. This strategy also has the benefit of discouraging further new development if household incomes do not continue to increase as expected. To the extent that there are glitches in the employment and/or household income growth projections, I expect that any adverse consequences will be seen in rent growth rather than occupancy. Otherwise, rents should continue to grow in parallel to household income growth.

Conclusion

Overall, I give the Jacksonville apartment market a “buy” rating based on expected continued solid performance. How this overall expected solid performance plays out between property classes and submarkets is the subject matter of my next post, as mentioned earlier.

If you would like to discuss these thoughts in more detail, please contact me:

            Paul B. Hazlett
            Real Estate Investment Advisor
            Coldwell Banker Commercial - Benchmark
            904.421.8523
            PHazlett@CBCWorldwide.com

(Note: unless otherwise attributed, data in this report is from the REIS Jacksonville Apartment Report – 2014 Quarter 1. To see the full report, go to Market Intelligence/Apartments - CBC Benchmark. The REIS property statistics include market-rate rental properties in complexes of 40 or more units located in Duval and portions of Clay counties.)