The multifamily industry suffers from a boom-bust cycle that’s more predictable than any other in real estate. I believe it’s a function of the time it takes to put up an apartment building compared to single family housing. The next bust is on its way and it could mean lower rents and higher vacancies for investors owning single family rentals in some markets as well apartment owners.
It takes about three years to put up the typical apartment building after financing has been secured. Apartment investors, tired of being burned by the cycle, are slow to make a commitment until markets are truly tight and rents are high. But during those three years, the homeownership market might improve, new single family housing will be built, and lots of other apartment developers will have the same. Add to the mix the single family rentals that are transforming rental markets today and it’s just a matter of time before, once again, apartment developers destroy their own market.
As of the first of the year, apartment developers had plans to build roughly 1.4 million new apartments nationally, according to data from the National Multifamily Housing Council. However, industry experts said it was too soon to worry about overbuilding. Most of those 1.4 million new projects were still on the drawing board at that time and the start of year experts expected 250,000 starts this year, slightly more than last year, when multifamily starts finished at an annual rate of just 212,000.
Yet just three months later tone has changed.
“Rents had been pushed so much at the upper end of the market it was inevitable we would begin to see a slowdown in growth for Class A properties, but we may also be seeing some impact from new properties coming online in certain markets. As new deliveries increase later this year and next, the trend could become even more pronounced,” said Ron Johnsey, president of Axiometrics, a Dallas-based research firm that follows multifamily.
The vast majority of metros across the U.S. fall into one of two categories: 1) Metros that are job growth leaders so they are expected to register strong housing demand keeping occupancy in good shape and, 2) Metros that are chronically under stocked with apartments so they need more supply to catch up with demand.
Listed below are ten major metros– those with at least 100,000 apartment units. Given we’re talking about product that will come on stream over the course of the coming 18 months for the most part, that means annual inventory growth should come in at 2 to 2.7 percent. Historically, expansion at that sort of pace hasn’t been a problem as long as it occurs alongside strong demand, generally triggered by healthy employment additions. However, it’s probably not a good idea to kick up the development pace in these spots too much beyond where it is right now.
Future Inventory Growth Leaders, Major Markets
1 Austin 12,690 6.8%
2 Raleigh/Durham 7,303 5.9%
3 Charlotte 7,088 5.7%
4 Denver/Boulder 11,472 4.4%
5 San Jose 6,385 4.3%
6 Washington, D.C. 19,457 3.7%
7 Dallas/Ft. Worth 22,837 3.5%
7 West Palm Beach 2,795 3.5%
9 Jacksonville 3,067 3.4%
10 Nashville 3,623 3.3%
10 Seattle 10,789 3.3%
12 San Antonio 4,811 3.0%
Future Inventory Growth Leaders, Small Markets
1 Charleston 2,033 5.1%
2 Salt Lake City 3,075 3.8%
3 Bridgeport/Stamford/Norwalk 1,663 3.6%
4 Des Moines 1,255 3.0%
4 Little Rock 1,309 3.0%
Whoa, wait a minute. Some of those markets look very familiar, like Austin, Charlotte, Denver, San Jose, West Palm, Seattle. They are all strong single family rental markets, some with hedge fund action. Single family Investors have moved in and filled much of the rental before the new apartment buildings topped out. Looks like everybody is reading the sale local economy outlooks and cap rates.
For generations, multifamily has been the only rental game in town. It’s not used to building supply and demand projections that in include single family, but times have changed. Slightly more than half of all rental units in the U.S., or around 21 million units, are single-family homes. Around four in five of those unit owners are individual investors.
Add into the equation a renewed interest in homeownership as rates remain low, prices remain relatively affordable and buyers scramble for diminished inventories. Will apartments overbuild yet again? If they do, this time they’ll flatten rents for single family landlords as well.