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SECTION 1 | MARKET PERFORAMANCE<br />
Executive Summary (continued)<br />
RED 49 METRO PERFORMANCE<br />
• Fourth quarter rent trends surprised on the high side in<br />
many “growth markets.” Effective rents increased in Atlanta,<br />
Austin, Charlotte, Dallas, Denver, Orlando and Phoenix by an<br />
inven<strong>to</strong>ry weighted average of 5.9% Y-o-Y. Their respective<br />
rent equations (“in-sample forecasts”) projected a 5.6%<br />
increase.<br />
• Rent growth in the primary markets averaged 3.1%, below<br />
the RED 49 average and the 3.3% in-sample forecast. Miami,<br />
Palm Beach and Seattle were positive outliers, posting fast and<br />
above forecast growth. Fort Lauderdale, the Inland Empire,<br />
New York and the Washing<strong>to</strong>n suburbs recorded soft and<br />
below forecasted results.<br />
• Texas and Southeast markets continued <strong>to</strong> shine. Our five<br />
covered Texas markets notched 5.4% average rent growth,<br />
<strong>to</strong>pping the in-sample forecast by 40bps. Southeast markets<br />
averaged 5.0% gains versus a 4.9% in-sample bogie.<br />
• The Pacific Northwest and Intermountain states also reported<br />
strong results. Rents increased by an average of 5.2%, <strong>to</strong>pping<br />
the group’s 4.6% in-sample forecast.<br />
• Northeast and Mid-Atlantic Region metros underperformed.<br />
Rents advanced at a 1.9% average rate, missing the in-sample<br />
forecast by 50bps. Only the District of Columbia (2.4%)<br />
<strong>to</strong>pped its in-sample forecast.<br />
RED 49 METRO LEVEL EXPECTED<br />
TOTAL RETURN OUTLOOK<br />
• The pop in Y-o-Y rent growth observed in 4Q<strong>17</strong>, and some<br />
upward revisions by Reis of earlier rent observations caused<br />
our rent models <strong>to</strong> raise forecasted rent growth rates in a host<br />
of metro areas. The biggest beneficiaries were Cincinnati,<br />
Denver, Los Angeles/Orange County and San Jose.<br />
• Conversely, in situations where rents and absorption are<br />
adversely affected by rising home prices, expected rent<br />
growth and <strong>to</strong>tal returns declined. Prominent among these are<br />
Dallas, Fort Worth, Portland, Sacramen<strong>to</strong> and the District of<br />
Columbia.<br />
• Among the seven metros with highest ETRs, five are<br />
institutional inves<strong>to</strong>r favorites: Charlotte, Los Angeles,<br />
Nashville, Salt Lake and San Francisco.<br />
• As a group, the primary markets remain attractive. Prominent<br />
exceptions include parts of Southern California, South Florida<br />
and Washing<strong>to</strong>n, DC/Suburban Virginia.<br />
• Texas, the Southeast and the Intermountain states continue <strong>to</strong><br />
offer compelling opportunities.<br />
• Most of the Midwest remains attractive for income oriented<br />
and risk-averse inves<strong>to</strong>rs.<br />
• California markets also lagged, rising 3.1% (in sample = 3.4%),<br />
held back by soft Bay Area, Orange County and Inland Empire<br />
results.<br />
• Midwest market rent performance was credible, advancing<br />
3.8% and <strong>to</strong>pping the 3.6% in-sample bogie. Surprising<br />
strength in Chicago, Detroit and Milwaukee was largely<br />
responsible.<br />
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