Multifamily Development Asymmetrical Across Markets

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IRVINE, CA-Multifamily supply-demand dynamics are playing out as we have expected, and the market appears to be approaching its zenith for the cycle. Demand remains healthy but completions are picking up to take advantage of low availability and rising rents. Indeed, evenly matched absorption and completions in the second quarter left vacancies unchanged from the previous quarter, the first time this has happened since the apartment segment recovery commenced in 2010. US apartment vacancies are currently very tight, which has prompted a major resurgence in multifamily construction in order to meet demand. However, the increase in multifamily development is uneven across markets. Some markets have yet to see any increases in new supply, while other very tight markets are already seeing their apartment inventory swell.

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The tightest apartment markets, such as New York City and San Jose, are on the two coasts, where development has historically been more difficult. However, markets like Minneapolis and Portland also have very low availability, which has not been the case historically. Not surprisingly, the apartment markets currently showing the biggest vacancy declines are those where vacancies are higher than average and have more potential for improvement, like Memphis. Meanwhile, the unevenness of supply additions is starkly evident in the chart above, which shows six markets that added at least 1% to their apartment inventory over the past two quarters, versus seven markets with no new supply over that same time. As would be expected, development is focused on tight markets with strong rent growth. Generally, Midwest and post-housing bust markets comprise the areas with little or no new supply at this time. Seattle, Nashville and Denver are all among the top six markets over the past two quarters in terms of both supply growth as a percent of total stock and effective rent growth, clearly marking the correlation.

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Going forward, we can expect to see supply increase further at the overall national level while regional differences persist. Some markets with higher vacancies and more slowly developing economic recoveries will continue to see an absence of new supply due to insufficient improvement in fundamentals. At the same time, the markets we have highlighted with the strongest rent growth and lowest vacancies due to robust absorption will likely see more supply come to fruition in the coming quarters, leveling off regional vacancies.

Peter Muoio Ph. D. is a managing director at Auction.com and is head of the Auction.com Research Center team. He is a veteran of the real estate industry and founder of the research and consulting firm Maximus Advisors, which Auction.com acquired in December 2012. The views expressed in this column are the author's own.