NEW YORK CITY—For the sixth consecutive quarter, the number of apartment completions in the third quarter nationwide edged out net absorption, albeit by the narrowest of margins, Reis Inc. said Tuesday. The narrow gap—51 units across the 275 markets Reis tracks—between new supply and demand, coupled with a trailing 12-month slowdown in deliveries, suggests that developers are reacting to the high volume of construction with some caution.
The 37,744 units delivered during Q3 represents a decline from the previous quarter's deliveries, although chief economist Barbara Denham points out that the construction tally could be revised upward as data are finalized. Meanwhile, the nationwide vacancy rate held steady at 4.4% during Q3.
Such revisions in construction totals, Denham says, “are typical during periods of rapid change when volume is this high, making it difficult to track both certificates of occupancy as well as leasing.” Although there's generally some seasonality at work during the third quarter of a year, “the decline in construction volume versus the previous two quarters suggests that developers are not rushing to complete construction.”
Over the 12 months that ended Sept. 30, the total number of units completed was 193,660, a decline from the 12-month figure in Q2: 198,232 units, “which was significant and reminiscent of the 1980s savings-and-loan boom,” says Denham. “Thus, the slowdown is a healthy sign that developers are showing caution.” Another indicator of this caution: “multifamily housing starts have slowed in recent months.”
Evidence that recent multifamily permits have slowed considerably suggests that developers, and likely lenders, are concerned about leasing the plethora of units expected to come online in the coming year or so. Much of Q3's slowdown in net absorption was a delayed reaction to weak economic conditions during Q1. Although job growth has improved considerably in recent months, “tenants may further delay leasing decisions until after the upcoming election,” observes Denham.
Barring this potential election “hiccup” in the market, though, Denham says net absorption should improve in the next few quarters as job growth should hold steady, even as new construction is likely to continue outpacing net absorption. Rent growth should stay muted to below 4% on an annual basis in the quarters to come.
In fact, Q3 rent growth of 0.9% was in line with Reis' forecasts and demonstrates the overall health of the apartment market. “New construction should continue to exceed net absorption in most of the coming quarters; however, increases in job growth as well as the surprising slowdown in the housing market suggest that demand should remain strong enough to prevent vacancy from rising significantly,” says Denham.
An increase that isn't significant isn't the same as no increase at all, though. Given the expected uptick in construction volume combined with the deceleration in demand, Reis expects vacancies to increase steadily over time. Denham notes that the increase in vacancy is “heavily concentrated in newer properties” that are not securing tenants at the brisk pace they had seen prior to 2016.
“The vacancy rate for newly completed properties has been increasing sharply over the last 18 months,” according to Denham. “Developers had enjoyed healthy rent growth and significant pre-leasing just a few short years ago when the housing market was struggling to gain footing. But since then developers have been overbuilding in some markets as demand has ebbed somewhat. Moreover, pent-up demand for home purchasing could curtail apartment demand growth, even though job growth should hold steady over the next few years.”
Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.
The 37,744 units delivered during Q3 represents a decline from the previous quarter's deliveries, although chief economist Barbara Denham points out that the construction tally could be revised upward as data are finalized. Meanwhile, the nationwide vacancy rate held steady at 4.4% during Q3.
Such revisions in construction totals, Denham says, “are typical during periods of rapid change when volume is this high, making it difficult to track both certificates of occupancy as well as leasing.” Although there's generally some seasonality at work during the third quarter of a year, “the decline in construction volume versus the previous two quarters suggests that developers are not rushing to complete construction.”
Over the 12 months that ended Sept. 30, the total number of units completed was 193,660, a decline from the 12-month figure in Q2: 198,232 units, “which was significant and reminiscent of the 1980s savings-and-loan boom,” says Denham. “Thus, the slowdown is a healthy sign that developers are showing caution.” Another indicator of this caution: “multifamily housing starts have slowed in recent months.”
Evidence that recent multifamily permits have slowed considerably suggests that developers, and likely lenders, are concerned about leasing the plethora of units expected to come online in the coming year or so. Much of Q3's slowdown in net absorption was a delayed reaction to weak economic conditions during Q1. Although job growth has improved considerably in recent months, “tenants may further delay leasing decisions until after the upcoming election,” observes Denham.
Barring this potential election “hiccup” in the market, though, Denham says net absorption should improve in the next few quarters as job growth should hold steady, even as new construction is likely to continue outpacing net absorption. Rent growth should stay muted to below 4% on an annual basis in the quarters to come.
In fact, Q3 rent growth of 0.9% was in line with Reis' forecasts and demonstrates the overall health of the apartment market. “New construction should continue to exceed net absorption in most of the coming quarters; however, increases in job growth as well as the surprising slowdown in the housing market suggest that demand should remain strong enough to prevent vacancy from rising significantly,” says Denham.
An increase that isn't significant isn't the same as no increase at all, though. Given the expected uptick in construction volume combined with the deceleration in demand, Reis expects vacancies to increase steadily over time. Denham notes that the increase in vacancy is “heavily concentrated in newer properties” that are not securing tenants at the brisk pace they had seen prior to 2016.
“The vacancy rate for newly completed properties has been increasing sharply over the last 18 months,” according to Denham. “Developers had enjoyed healthy rent growth and significant pre-leasing just a few short years ago when the housing market was struggling to gain footing. But since then developers have been overbuilding in some markets as demand has ebbed somewhat. Moreover, pent-up demand for home purchasing could curtail apartment demand growth, even though job growth should hold steady over the next few years.”
Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.
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