Smaller Metro Apartment Markets Often Outperform Larger Neighbors

The list of top-performing metro apartment markets for November 2017 includes sprawling metropolises such as Houston, Phoenix, Denver and Los Angeles. But primary markets such as New York, Dallas or Seattle are nowhere to be found. Instead, smaller markets adjacent to those three have higher effective rent growth than their big brothers.

New York and Long Island (the Nassau County-Suffolk County Metropolitan Division) is one example. Although New York gets most of the attention, given its comparative market size and the city’s status, The Long Island metro’s apartment market’s rent growth has become a major story.

Long Island averaged 3.8% annual rent growth since January 2015. Though not among the leaders during the past three years, it’s 250 basis points (bps) higher than New York’s 1.3%. Long Island has also been among the nation’s occupancy leaders, averaging 96.7% since January 2015. It current stands second in the nation behind only Minneapolis-St. Paul.

Elsewhere, the Dallas metro apartment market usually takes the North Texas spotlight, but Fort Worth has outshined its eastern neighbor over the past three years. Since January 2015, Fort Worth has averaged a robust 5.7% annual effective rent growth, compared to Dallas’ 4.6%. Fort Worth has also been able to maintain higher occupancy than Dallas: 95.4% compared to Dallas’ 95.2%.

Another example of the smaller metro apartment market outperforming its more decorated neighbor can be found in Seattle and Tacoma.

Seattle’s success since 2015 is not in doubt, averaging 6.3% annual effective rent growth. Occupancy has remained above 95.0%.

But Tacoma has had higher rent growth and occupancy over the past three years. Annual rent growth has averaged a remarkable 8.3%, and occupancy has averaged an equally impressive 96.4%.

What might be causing the discrepancy in market performance between these marquee-name markets and their lesser-known neighbors? There are a few potential explanations.

In most of these “secondary” markets, inventory growth has been significantly less than their counterparts.

For instance, Dallas has averaged 3.4% inventory growth over the past five years, while Fort Worth has only averaged 1.7%. Seattle inventory growth (2.8%) has overshadowed that in Tacoma (0.8%) substantially. While New York’s 0.8% growth is not all that much greater than Long Island’s (0.5%), New York’s existing stock is so much greater than Long Island’s that the 30 bps difference has a huge impact.

The ultimate implication with these inventory growth numbers is that there is less new supply – both on an absolute and a relative basis – in Long Island, Fort Worth and Tacoma than their larger counterparts. In turn, this lower supply growth has a positive impact on rent growth.

Also, it should be noted that average job growth for the past five years in these adjacent markets compares favorably to the primary market.

New York (2.1% annual job growth) has been slightly greater than Long Island (1.4%). Seattle (2.9% annual job growth) only slightly outpaced Tacoma at 2.7%. The only real exception among these examples is Dallas’ blistering 3.8% annual job growth over the past five years, which has outperformed Fort Worth (2.1%) by some margin.

New York (2.1% annual job growth) has been slightly greater than Long Island (1.4%). Seattle (2.9% annual job growth) only slightly outpaced Tacoma at 2.7%. The only real exception among these examples is Dallas’ blistering 3.8% annual job growth over the past five years, which has outperformed Fort Worth (2.1%) by some margin.

The takeaway from a job growth perspective is that even though the primary market has far larger employment bases, it is not exactly as though job growth in the smaller neighboring markets has been detrimental.

To use an age-old axiom in the real estate industry, location certainly does matter. And while not every company’s strategy best aligns with locating in adjacent markets such as these, it should also not be discounted either, as there is potential there for success on a property-by-property or a portfolio-by-portfolio basis.