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Rent growth eases: Why it is happening here and not there

Sky-high apartment rents are finally beginning to crack.

Annual gains in the first quarter were still a relatively strong 4.1 percent nationally, but that is a significant drop from the 5 percent gains the market was seeing one year ago, according to Axiometrics. The first quarter rate was also 52 basis points lower than that reported in the fourth quarter of 2015. Rent growth has been 4 percent or higher for seven-straight quarters, but wage growth is nowhere near strong enough to meet the gains, leaving renters more cash-strapped than ever before.

Rent gains had been strongest in some of the largest metropolitan markets, and they are now the first to see the easing. Younger workers, priced out of these markets, have been choosing smaller cities, and now rents in those cities are strengthening.

A sign advertising an apartment for rent is displayed in front of an apartment building in San Francisco, California.
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A sign advertising an apartment for rent is displayed in front of an apartment building in San Francisco, California.

"The significant declines in primary metros such as the Bay Area, New York, Denver and Houston are being somewhat offset by robust gains in secondary markets like Sacramento, Orlando and Salt Lake City," said Jay Denton, Axiometrics' senior vice president of analytics.

Sacramento and Portland, Oregon, reported double-digit rent growth in the first quarter. Oklahoma City was the only among the nation's top 50 markets to report negative rent growth. Cities like Boston, San Francisco and Austin, Texas, which have some of the highest rents in the nation, are seeing just about 5 percent annual gains now.

Occupancy remains high at 94.8 percent nationally in the first quarter, tied for the highest first quarter rate since the 95.7 percent at the start of 2001. It is about the same as one year ago, but down slightly from the fourth quarter of 2015.

Supply of new rental units continues to flood major markets, but mostly on the higher end. Supply of apartments is still well below demand in suburban areas and smaller cities, which is keeping rent growth strong there. In the hottest markets, like Denver, apartment developers have been particularly busy, and that will likely ease rent gains, but not for a few more years.

"While demand so far has been sufficient to absorb those units that have already come online, it may be stretched to accommodate the tens of thousands of units builders are planning to deliver over the coming years," Zillow director of research Krishna Rao wrote in a report. "In those coming years, Denver's run as one of the hottest rental markets in the country may come to an end as supply finally catches up to (and passes) demand."