What Stage in The Market Cycle is Your Target Apartment Investment Market?

Each year, Integra Realty Resources releases their ViewPoint report, which tracks major trends and development in the commercial real estate industry.

One of the data points in this report that is relevant to you as a multifamily investor is their categorization of the major cities into their respective stage in the market cycle. That is, which markets are expanding, which are recovering, which are experiencing hypersupply, and which are in a recession.

Based on the most recent multifamily market data, 83% of the markets reviewed are in the expansion phase and only one is in recession. According to IRR, most markets are in the expansion phase because debt capital for new development has been very disciplined and builders have been focusing on highly demanded niche products like senior housing, student housing, workforce housing, etc. Also, employment and unemployment trends have been the best demand indicator for apartments over time, and the number of jobs have been steadily increasing.

Before showing you which stage in the market cycle your target market is in, let’s first define the four stages:

Market Cycle Expansion Hypersupply Recession Recovery
Vacancy Rates Decreasing Increasing Increasing Decreasing
New Construction Moderate/High Moderate/High Moderate/Low Low
Absorption High Low/Negative Low Moderate
Employment Growth Moderate/High Moderate/Low Low/Negative Low/Moderate
Rental Rate Growth Medium/High Medium/Low Low/Negative Negative/Low

These four categories are a part of a cycle, which goes like this: recovery to expansion to hypersupply to recession back to recovery:

IRR also broke each of these four categories into three sub-groups, which for the purpose of this blog post I will label as 1, 2, and 3. Using expansion as the example, markets in the 1 subgroup have the strongest expansion market factors (i.e., vacancy rate is decreasing the most, new construction is highest, absorption is highest, employment growth is highest, and rental rate growth is highest), whereas markets in the 3 subgroup still meet the expansion criteria but not as much as the 1 subgroup (i.e., vacancy decreasing at a slower rate, moderate new construction, high absorption, moderate employment growth, medium rental rate growth).

Since this is a cycle, markets in subgroup 1 are closer to the previous market stage and markets in subgroup 3 are closer to the next market stage. So in reality, the market cycle looks more like this:

That said, here are the market cycle categorizations for all of the major cities/markets:

 

Expansion

Expansion 1

  • Jackson, MS
  • Las Vegas, NV

Expansion 2

  • Austin, TX
  • Cleveland, OH
  • Dayton, OH
  • Greensboro, NC
  • Indianapolis, IN
  • Long Island, NY
  • Los Angeles, CA
  • Nashville, TN
  • New York, NY
  • Orange County, CA
  • Orlando, FL
  • Sacramento, CA
  • San Diego, CA
  • Sarasota, FL
  • Tulsa, OK
  • Washington, DC

Expansion 3

  • Birmingham, AL
  • Boise, ID
  • Broward-Palm Beach, FL
  • Charlotte, NC
  • Chicago, IL
  • Cincinnati, OH
  • Columbia, SC
  • Columbus, OH
  • Dallas, TX
  • Detroit, MI
  • Fort Worth, TX
  • Greenville, SC
  • Hartford, CT
  • Jacksonville, FL
  • Kansas City, MO
  • Louisville, KY
  • Memphis, TN
  • Minneapolis, MN
  • Naples, FL
  • New Jersey, Coastal
  • New Jersey, No.
  • Oakland, CA
  • Phoenix, AZ
  • Pittsburgh, PA
  • Portland, OR
  • Raleigh, NC
  • Richmond, VA
  • Salt Lake City, UT
  • San Francisco, CA
  • San Jose, CA
  • Seattle, WA
  • St. Louis, MO
  • Syracuse, NY
  • Wilmington, DE

 

Hypersupply

Hypersupply 1

  • Atlanta, GA
  • Baltimore, MD
  • Charleston, SC
  • Denver, CO
  • Miami, FL
  • San Antonio, TX

Hypersupply 2

  • Boston, MA
  • Providence, RI
  • Tampa, FL

Hypersupply 3

  • Philadelphia, PA

 

Recession

Recession 1

  • None

Recession 2

  • Little Rock, AR

Recession 3

  • None

 

Recovery

Recovery 1

  • Houston, TX

Recovery 2

  • None

Recovery 3

  • None

 

What Does This Mean For Me?

Each of these markets are categorized based the following factors: vacancy rates, new construction, absorption, employment growth, and rental rate growth trends. So, one thing to think about is if you can find a submarket or neighborhood within one of the hypersupply or recession markets that have expansion or recovery factors. In other words, just because the overall market isn’t in the expansion or recovery phase doesn’t mean that you should abandon that market nor that you won’t be able to find great investment opportunities. In fact, you’ll likely be able to find more deals and have less competition when not pursuing expansion markets.

Additionally, if your market is in the 1 or 3 subgroup, you’ll want to monitor those market factors to see if the market has moved to another stage. This would be a good thing if your market moved from hypersupply 1 to expansion 3, and it would be concerning if your market moved from expansion 3 to hypersupply 1.

Lastly, just because your market is in the expansion phase doesn’t mean that every deal is a good deal. You should still complete a full underwriting analysis based on your business plan and perform the proper due diligence on all prospective deals.

 

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