We expect a sharp slowdown in apartment rental growth across the board, as job growth slows, affordability constraints bite and an influx of supply pushes up vacancy. But some markets will perform better than others. Rent prospects are strongest in the south, as relatively cheap rents attract footloose workers and encourage firms to expand, driving strong employment growth. By contrast, we are forecasting much weaker growth in the bigger cities, particularly Chicago, D.C. and San Francisco. Alongside these, rents in most western markets are set grow more slowly than in the south. Coupled with relatively low yields that means that western markets look most overvalued and are therefore likely to see the largest yields rises in the coming years. Overall, we expect San Jose, Seattle, NYC and Portland to be among the worst performing markets, along with San Francisco, where we expect average total returns to only just exceed 2.5% p.a. from 2023-26. (See Chart 1.) At the other end of the ranking, we have bumped up our yield forecast for Phoenix, where valuations also looked stretched. As a result, it has slipped down the rankings behind all southern markets, with Atlanta and Miami leading the pack with average total returns of almost 6% p.a.
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