Latest Wave of New
Apartments Shows Good Absorption
Mar 17, 2015
Bendix Anderson
With so many new apartments being built across the country, the cities that
have had the most new construction over the past five years show how the next
wave of new apartments now under construction might be absorbed.
“The bottom
line is a very basic story,” says Greg Willett, vice president of research and
analysis for MPF Research, a division of RealPage Inc. “Building a lot of
product isn’t a bad thing when there is demand there for all of those
additions.”
Relatively
strong job growth and pent up demand for apartments rescued apartment markets
developers built aggressively over the past five years. If that job growth is
interrupted, as it was in Washington, D.C., then apartment markets could choke
on the new supply. That’s what seems to be happening right now in Houston, as
the energy industry falters and local vacancy rates rise.
Fortunately,
the U.S. overall seems to be getting stronger and stronger—at least for now.
Generous
supply meets strong demand
Strong
demand absorbed most of the supply of new apartments over the last five years
in the metropolitan areas where developers built the largest numbers of new
apartments, relative to the size of the local market. In nine out of these 10
metro areas, rent growth remained positive, though rent increases typically
slowed in the peak years as new supply came online, according to MPF.
According to
Reis Inc., the percentage of vacant apartments did inch higher in many of the
towns that had the most new construction. However, vacancy rates remain low
overall. “Even with this large influx of new inventory over the past three
years, the 2014 year-end vacancy rates of all but three of these cities are
below their historical averages,” says Brad Doremus, senior analyst for
research and economics at data firm Reis, Inc. Those three cities include
Washington, D.C., and Raleigh-Durham, N.C., each of which experienced an
increase of at least 200 basis points. New York had a vacancy rate increase of
over 120 basis points over that period,”
“The
deliveries have leased up at very healthy rates, reflecting that these tend to
be spots realizing strong job growth,” says Willett. The apartment markets also
benefited as young people finally began forming their own households—and
renting their own apartments—after years of living with parents, staying at university
or doubling up with roommates during the Recession and the long slow recovery.
However, the
nine markets with the most new construction can’t absorb so many new apartments
forever. Rent growth is beginning to slow. “In almost all of these markets, the
2014 rent growth number would be far below the four-year average,” says
Willett. To avoid rising vacancies over the next five years, the construction
of new apartments will have to fall back to a more normal level. “You can’t
expect the market to continue to absorb so much,” says Willett.
Depending
on the Job Market
Of course,
all bets are off if job growth is interrupted in a market where developers are
rapidly building new units.
Over the
last five years, Washington, D.C., saw a great deal of apartment construction,
but the once-strong local economy suffered from budget cuts and layoffs of
government workers. Not surprisingly, the capital is the only city that seems
to have suffered from the extra large number of apartments developers finished
over the last five years.
“It’s the
only place where average annual rent growth over the five-year period is
meaningfully below the historical norm,” says Willett. Washington, D.C.,
averaged 2.5 percent rent growth over those five years. The nation’s capital is
also the only place where class-A apartment properties have trailed the
rent-growth pace realized for apartments overall—an important clue that too
many new apartments have hit the market.
Houston
seems to be following in Washington, D.C.’s footsteps. It had a very strong,
local economy that weakened just as a huge amount of new apartments opened
their leasing offices—just like Washington, D.C.
The numbers
of jobs in Houston grew by more than 100,000 a year, or 4 percent, in recent
years. Houston will create far fewer new jobs in 2015—just 60,000, according to
the latest forecast from the Greater Houston Partnership. Also in 2015,
developers in Houston will finish roughly 18,500 new rental apartments,
according to data firm Reis, Inc.
The
percentage of vacant apartments is projected to rise to 6.8 percent by the end
of 2015, up from 5.7 percent the year before. Over the next four to five years,
the vacancy rate is forecast to be in the 8 percent to 8.5 percent range,
according to Reis.
