Apt. Development Seen Tapering in 2014

DALLAS-Notwithstanding a wave of new units coming on line by year's end, the pace of multifamily development is moderating in the near term. So says locally based Axiometrics, which also noted Tuesday that rent growth nationally moderated slightly during the third quarter.

With the quarter winding down, Axiometrics said in a report late last week, “concern remains about which metropolitan statistical areas (MSAs) will become oversupplied due to new deliveries increasing more than demand or job growth. However, by the latter half of 2013, development of new apartment properties is expected to spread more broadly and to encompass a more generalized suburban sector.” For the full year, Axiometrics is forecasting delivery of 180,723 units across 192 MSAs, up from 86,554 the year before.

Starting next year, the research firm predicts, “the development of new apartments will slow until investors and developers see new supply absorbed and market conditions recalibrated.” Given the increases in construction and labor costs, and a slowdown in class A rental growth, “many planned projects are no longer feasible at the current levels of rent and may not be started.” That will mitigate the possibility of oversupply.

As it is, annual multifamily permits nationwide decreased 15.7% in August to 268,000 from July's annual rate and were 3.9% lower year over year, according to US Census data cited by Axiometrics. By contrast, single-family permits in August rose to 627,000 units, up 3% from the July number and more than 20% over August 2012.

Three of the top 10 MSAs for multifamily permitting for the trailing 12 months that ended August 31 were in Axiometrics' home state. They included New York City, with 19,718 units; Houston, 13,515 units; Austin, TX, 11,672 units; Dallas, 9,502 units; Los Angeles, 8,599 units; Seattle, 8,264 units; Denver, 7,975 units; Washington, DC, 7,736 units; Atlanta, 7,556 units; and Orlando, 7,032 units. While urban infill locations still account for the majority of the supply being delivered this year, construction activity is accelerating in the suburbs and around outer employment nodes of some MSAs as opportunities dwindle in the urban core, according to Axiometrics.

“Developers share the same concerns as employers, with added worries about potential overbuilding in the most active markets, rising interest rates, and slower job growth dampening demand,” according to Axiometrics. Increased renter household formation after the recession, concurrent with a drop in the national homeownership rate, has buoyed apartment demand in the last few years and helped ease apartment developers' fears.

The company is forecasting “continued moderate growth” in building permits for multifamily properties of five units or more for the balance of this year. Developers will remain cautious about new projects in some of the most active markets, such as Washington, DC, Raleigh, and Austin, “until the current wave of new construction is absorbed and revenue growth appears stable or growing.”

Annual effective rent growth moderated slightly to 3.2% in Q3, compared to 3.7% Y-O-Y. Axiometrics data showed that the effective rent growth rate has slowed for nine consecutive quarters as many MSAs are decelerating from very strong growth over the three years prior. The peak for annual rent growth at the national level was 5.3% in July 2011.

Despite the slowdown nationwide, Axiometrics says, many individual markets are still producing “very strong rent growth rates,” and 23 of the top 88 MSAs have reported annual effective rent growth of greater than 4%. And although the national growth rate has been slowly decelerating over the past nine quarters, “it should also be noted that the current growth rate is still above the long-term average of 2.1%,” according to Axiometrics.