A leading concern in the U.S. multifamily market is the pace of development activity. New supply (deliveries) began outpacing demand in 2016 and continues this year. In fact, 2017 will be the peak year for apartment deliveries in this cycle.
Multifamily demand remains generally favorable throughout the U.S. and for all types of product. And the supply overhang is not dramatic. However, the concern is that sustained high levels of deliveries could turn into greater market imbalance (at least in the urban core submarkets where a sizeable portion of the new supply is being delivered).
A key assumption to the supply story is that development starts are slowing. If that is the case, then the oversupply situation could be corrected sooner rather than later (beginning mid 2018) provided demand remains robust as is our current outlook. Through the second half of 2016, at the national level, it had appeared that construction starts were falling, albeit slowly. Yet, the latest data indicates otherwise. Q1 2017 had a significant upsurge in starts as shown on the graph below (data in thousands of units for the markets tracked by CBRE Econometric Advisors).
Additional data on national multifamily construction from the U.S. Census Bureau confirms that the pace of development hasn’t turned the corner yet. Year-to-date through April 2017, multifamily starts (5+units) are running at an annual rate of 375,000 units, 3.9% higher than the same period in 2016. Also, U.S. multifamily permits are up 1.4% for the first four months of 2017 – 119,000 total units and a seasonally adjusted annual rate of 401,000.
CBRE Research still expects starts to slow through the balance of 2017 given a variety of factors including rising construction costs, increased challenges and costs of obtaining financing, lower effective rent growth (or decline) in the newer urban communities and slower lease ups. Given the Q1 new supply picture, however, that slowdown may still be a quarter or two further into 2017.
At the metropolitan level, the multifamily construction starts story has considerable variation. The analysis of Q1 2017 data reveals that multifamily construction starts were slowing in 11 or 31% of the markets tracked. (We analyzed construction pipeline data from CBRE Econometric Advisors for 36 markets, covering most of the medium and large metropolitan areas of the U.S.) The set of markets where construction starts are slowing include Boston, New York, Houston, Minneapolis, Phoenix, Las Vegas and Orange County.
Multifamily construction was either still rising or stable in 16 or 44% of markets. The trend is not clear in another 25% of markets surveyed. Among the markets where the Q1 data showed rising construction starts included Philadelphia, Charlotte, Atlanta, Orlando, Miami, Denver, Los Angeles, San Diego, San Jose, Oakland, Portland and Seattle.
Prepared by Jeanette Rice, Americas of Head of Multifamily Research, CBRE