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RCG 17 Guide to Markets FINAL[1]

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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 />

5

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