Elevated Apartment Supply Won't Bottom Out Until 2026
But data from individual metros show that the decline in new apartment supply has already begun in some markets
Predictions by some experts that the nation’s current oversupply of apartments will decline by the end of 2024 are not supported by a new analysis from Yardi Matrix.
Instead, Yardi proclaimed, “the under-construction pipeline is robust, and elevated deliveries are anticipated for 2024 and 2025.” In all, 766,353 units are still scheduled for completion by as late as early 2026. That is a 9.9% quarter-over-quarter and 36.6% year-over-year increase. In addition, 483,207 units were in lease-up in Q1 2024 — for a total of 1.25 million units under way.
Yardi attributed these high levels to elevated completion times, with days in construction for both garden and midsize properties at or near record levels. In 4Q 2023, the national average time to build a garden-level property was 697 days, compared to the annual trailing average of 678 days. For midsize properties, construction time rose from 738 to 770 days. High-rise completion times have reverted to pre-pandemic levels.
Nevertheless, “a gradual but not disastrous slowdown in multifamily development is taking hold,” Yardi opined, noting that new supply should bottom out in 2026. While Yardi found new supply increased 0.7% between 4Q 2023 and 1Q 2024, and anticipates a 1.6% rise in 2025, it predicted declines of 0.2%, 0.7% and 0.5% in the years 2026, 2027 and 2028 respectively. Data from the Census Bureau’s Residential Construction report supports Yardi’s view that starts should continue to show declines for 4Q 2023, Yardi said.
Another hint of a coming slowdown is in the Architectural Billing Index for residential design. The index for December 2023 came in at 45.8 – the 17th consecutive month it has been below 50. Scores below 50 denote billing contraction.
Data from individual metros show that the decline in new apartment supply has already begun in some markets. Nationally, 50% of starts in 2022 were in just 22 markets. While the national trend is toward oversupply, starts in 18 of those markets in the first three quarters of 2023 fell compared to the same period in 2022 – in some cases sharply. In Indianapolis, they plummeted 57.4%, in Salt Lake City 44%, in Seattle 40%, in suburban Atlanta 39.7%, and in southwest Florida and Dallas 34.2%. Among the 22 markets, more starts were registered only in Tampa (62.5%), Raleigh-Durham (48.7%), Dallas North (48.2%) and Phoenix (3%).
“Both the planned and prospective development pipelines remained flat in 4Q 2023, continuing a trend that began midyear,” Yardi reported. The company predicts “a mild recession” in 2024. “This will result in new supply bottoming in 2026 at roughly 377,000 units. A modest recovery will take hold in 2027, bringing that to 395,000 units. Our forecast for the later years models new supply at around 2.25% of stock, or 402,000 units in 2028 and 426,000 in 2029.”
If that optimistic forecast doesn’t pan out, Yardi assumes a deeper recession, tight financing, poorer multifamily fundamentals, a drop in new construction starts lasting into 2025, and a 38% peak-to-trough plunge in new supply.