New Multi-Family Construction Slowing Down, Which Is A Good Thing

CBRE Research recently analyzed US Census Bureau and CBRE Econometric Advisors data to determine that September 2018 saw a 9.3% drop in permits for new multifamily construction. That is a good thing for balancing demand, reducing possible over-supply in the event of an economic downturn, addressing recent slight upticks in vacancy (though occupancy remains very strong in general), and reducing the chance of half-completed shell projects stalling in a demand downturn if it should occur. Natural attrition of apartments, increasing population, and changing cultural favorability toward renting should all hopefully help maintain multifamily demand and economic drivers into the foreseeable future. It is good that there is some advance foresight coming from developers, before over-supply becomes a major problem later.

Current underway construction activity is still at high levels, though that activity should begin reducing in 2019 based on the current planned pipeline. Largest permit declines occurred in the Midwest and Northeast, moderate decrease in the South, and only a slight decrease in the West. Seasonally adjusted multifamily permit rates have been steadily declining since March 2018, indicating a sustained trend. Interestingly, the Northeast region had the largest year over year increase in construction starts in September. So, that region still has lots of current activity yet significantly reduced interest in continuing that level of activity.

Total net absorption of units was at its highest level in over 15 years, so supply/demand still remains strong. Nonetheless, selecting properties in areas with solid demand drivers still remains as critical as ever when planning for the long term.