Several Small Apartment Markets Still Seeing Big Performance

A handful of smaller apartment markets are still churning out strong performances, despite the damage the nation has suffered from COVID-19 in recent months. These smaller markets – with apartment bases ranging in size from 25,400 units to 81,000 units – are also areas that are forecasted to remain comparatively healthy in the near term.

Huntsville, AL

Huntsville was the nation’s leader for growth in effective asking rents in 2nd quarter, with an annual increase of 6% – well above the nation’s average performance of -0.2%. Strong pricing power was seen across the product spectrum, with hikes of roughly 5% to 7% in every asset class. Asking rent growth in Huntsville has made notable progress in the past six years. After suffering cuts near 3% in early 2014, the market made quick work of getting back on track. While recent increases were down from the peak seen in 1st quarter, growth is still notably ahead of the decade average of 2.9%.

Monthly rents in Huntsville are now over $900, ranging from about $1,200 in the Class A projects, roughly $900 in the Class B stock and at nearly $700 in the Class C properties.

Inspiring solid rent growth, occupancy in Huntsville is also in great shape at 96.8%. While down 90 basis points (bps) from the recent peak seen in 3rd quarter 2019, the current showing is still up 20 bps year-over-year.

The key to Huntsville’s apartment market resilience is the local economy, which is home to a big base of well-educated workers with high-paying jobs in NASA’s space flight center, the Army’s missile development and testing facilities, and private employers like Boeing and Teledyne Brown Engineering. While the economy here started losing jobs in April, just like the rest of the nation, the decline in Huntsville has been relatively mild, with less than a 5% annual decline to the workforce seen in the June. In comparison, the U.S. overall saw its job base contract by 8.4% in June.

A solid job base has helped apartment demand in Huntsville notably outweigh supply in the past four years, even though deliveries have been elevated. Of the 30,800 units in Huntsville’s apartment base, about 5,000 units were built during the past decade. Ongoing construction of nearly 2,400 units will result in a near-term inventory expansion of 7.7%. While that is a little more future supply than is ideal in today’s environment, this market’s strong fundamentals are likely to hold up, especially with such a solid base of government jobs.

Boise, ID

Boise has seen job base growth outpace the U.S. average for much of the past decade. While this market didn’t completely escape the recessionary decline starting in April, the contraction here was modest, and employment loss in the year-ending June was very mild, a mere 1%. Nationwide, only College Station and Provo saw less decline. Therefore, Boise looks like it might be one of the nation’s first markets to regain all the jobs shed earlier this year. In turn, this emerging tech hub is likely to remain a U.S. leader for population growth, especially given the area’s lifestyle appeal.

Asking rent growth has been strong in Boise in the past five years, averaging at about 6% annually. While the recent performance is a bit below that norm, at 5.1%, it still ranks as one of the nation’s best showings in 2nd quarter. Recent growth took average rents to $1,181 per month. Class A stock here goes for nearly $1,400, while the Class C units average at about $940.

Boise’s housing stock is heavily focused on the single-family market, and the apartment base is relatively small at about 25,400 units of existing stock. New deliveries have been sizable in recent years, however, and demand has steadily kept pace with those new units, resulting in notably strong occupancy of 97.1% in 2nd quarter. Completions are expected to be even more elevated in the near term, as the 3,200 units currently under way here represent a nearly 13% increase to supply. That’s one of the most aggressive pipelines nationwide.

Tucson, AZ

Tucson is one of only a handful of markets nationwide where apartment occupancy is still making progress. Occupancy climbed 50 bps year-over-year, reaching 95.8% in 2nd quarter. This was one of the strongest showings Tucson has seen in at least two decades.

Strong occupancy has inspired operators to push rental rates in Tucson. While growth in effective asking rents has cooled from its recent peak near 8% from 1st quarter 2019, the 2nd quarter 2020 level is still quite healthy at 3.5%. This market started the first five years of the economic upcycle with little to no rent growth. Then, in 2015, before occupancy even reached the essentially full mark, effective asking rents jumped, and annual increases have averaged closer to the 5% mark since. Tucson’s Class B units are doing especially well when it comes to pricing power, with effective rents climbing 4.3% in the year-ending 2nd quarter.

Helping Tucson maintain solid performance, this market – with a total apartment count of about 81,000 units – has not seen a lot of new supply in recent years. In fact, apartment demand has at least doubled delivery volumes nearly every quarter since 2018. Looking forward, supply should remain somewhat limited. There are 1,600 or so units currently under construction in Tucson, which will result in a mild 2% increase in inventory.

Holding up demand in Tucson, this is another small market where employment change remains in comparatively good shape. June’s job count is only about 3% under the year-ago level, one of the smallest downturns nationwide. Most of the metro’s biggest corporate employees have avoided major layoffs. That includes defense contractor Raytheon, which provides about 13,000 jobs locally in the firm’s missile production division.

Tacoma, WA

At 96.5%, apartment occupancy in Tacoma is at one of its best showings in decades. Even more impressive, occupancy has been hovering at that record rate – between 96% and 97% – for four years now, despite a recent increase in supply volumes. Occupancy in this market’s Class C product line was especially tight in 2nd quarter at 98.3%.

Tacoma’s change in effective asking rents was at 3.3% in the year-ending 2nd quarter. That was one of the strongest showings in the nation, though it was down a bit from the pace this market set just a few years ago, when asking rent growth peaked near 10%.

Monthly rents in Tacoma averaged $1,386 in 2nd quarter. While that’s quite steep for this market historically speaking, it’s still roughly $500 under the norm seen in nearby Seattle.

Tacoma’s existing apartment base totals 59,000 or so units, with about 6,700 of those built in the past decade. Though supply volumes have increased in the past year, the market has absorbed those units well. Ongoing construction of some 1,700 units represents modest inventory growth of 2.9% over roughly the next 18 months.

Colorado Springs, CO

Supply volumes have revved up notably in Colorado Springs, reaching at least a two-decade high at nearly 1,400 units in the year-ending 2nd quarter. In the past 10 years, inventory here has increased by about 12%, taking the total unit count to roughly 50,800 units. While strong for this market, that expansion rate is only about half the growth pace seen in nearby Denver. Looking forward, ongoing construction in Colorado Springs is more reserved. Near-term additions of 1,300 units will boost the stock by 2.6%, quite a bit below the average 3.4% pace seen in the nation overall.

Though new deliveries have been high in Colorado Springs, absorption has also been strong. Annual apartment demand hit a 14-year peak of nearly 1,700 units in 1st quarter. Though demand took a bit of a hit in 2nd quarter, the volume here was still strong at about 1,200 units. With demand keeping pace with supply, occupancy in Colorado Springs is strong at 95.7%. That’s a few ticks ahead of the market’s decade average and the U.S. norm.

Colorado Springs has experienced a great deal of rent growth over the course of the past decade. Asking pricing is up more than 50%, well above the average increase in the U.S. Today’s annual increase in effective asking rents is solid at just under 3%, taking the typical monthly rent to nearly $1,200.

Contributing to the apartment performance in Colorado Springs, the economic story here is a bit rosier than some other places in the U.S. While the employment base here started contracting in April, cuts were not as severe as what was seen in the nation overall, and the job count as of June was down from the year-ago level by a mild 4.4%. Key job anchors in Colorado Springs include the Air Force Academy as well as defense giants Lockheed Martin and L3 Harris.

For more on these and other small markets, watch the recent webcast Up Close and Local: Small Metros Market Update on demand.