Stand and Deliver

Multifamily development is generally positive for the industry but can have an unfavorable impact when too much product is built.

On the positive side, development provides investment opportunity for both the developers and their capital partners. Development responds to housing demand and provides housing to thousands of Americans. Moreover, development is generally positive for enhancing the vitality of cities and individual neighborhoods.

For developers, owners and investors, especially of Class A multifamily, however, there’s continued concern that too many new high-end units are still being built, creating new pockets of oversupply or preventing existing oversupplied pockets from fully absorbing the units delivered over the past few years.

A fresh look at national construction trends reveal that the multifamily market is positioned to experience high levels of completions well into 2020; however, after that the pace may change.

In terms of completions, CBRE Econometric Advisors (CBRE EA) reports that 267,000 units were delivered over the year ending Q1 2019 or 67,000 per quarter. However, the peak quarters of this cycle are still to come. CBRE EA projects the balance of the year to bring an average of 90,000 units per quarter, and full-term 2019 completions should total 310,400 units. After that, CBRE EA expects deliveries to moderate considerably. CBRE EA forecasts 2020 total deliveries total 199,600 units—still an active development arena, but much substantially under 2019.

The latest construction data from the U.S. Census Bureau is sending out mixed signals and no firm confirmation of the EA projections. On the one hand, the number of multifamily (5+) units permitted this year (through May) have edged up 2.9% over the same period in 2018. (Last year, 427,400 multifamily units received permit approval, slightly higher than 2017. However, 2015’s 454,500 units was higher, and the highest year since 1986.)

While permits are up modestly this year, starts have dropped. Through May, 146,900 multifamily units have been started according to the Census, a 5.2% decline from last year.

The Census reported the number of multifamily units under construction at 597,000 in May. This level is on par with that of a year ago. In fact, the under-construction level has held fairly constant at around 600,000 units for the past three years. So, there’s still a very large level of supply in the pipeline.

The Census statistics concur that high levels of apartment deliveries will continue through 2019. And 2020? While CBRE EA suggests that 2020 will see a significant decline in deliveries, the Census metrics suggest that completions will remain high even in 2020 and likely close to the 2019 level.

Our crystal ball for the years following is less clear. Note that the numerous reasons why multifamily development should have slowed down by this point in the cycle have not been totally effective. Development has generally become more difficult and yields lower, but developers have found the path to continue.

Behind the broad national trends are notable momentum variations by geography. First, more development today is occurring in suburban neighborhoods relatively to urban than earlier this cycle. The suburban development is less at risk of oversupplying the market.

Second, two-thirds of metros have already experienced peak deliveries according to CBRE EA. Of the 46 metros with at least 90,000 units of inventory, 14 peaked prior to 2018 and 17 in 2018. The markets which peaked prior to 2018 are: Baltimore, Cincinnati, Cleveland, Columbus, Houston, Kansas City, Las Vegas, New York, Pittsburgh, Raleigh, Salt Lake City, San Diego, St. Louis and West Palm Beach.

The 17 metros which peaked in 2018 are: Boston, Charlotte, Denver, Ft. Worth, Indianapolis, Nashville, Orange County, Orlando, Philadelphia, Phoenix, Portland, Inland Empire, San Antonio, San Jose, Seattle, Tampa and Washington, D.C.

Most of the remaining markets are expected to experience peak level of completions this year. These markets are: Atlanta, Austin, Chicago, Dallas, Detroit, Ft. Lauderdale, Los Angeles, Miami, Newark, Oakland, Providence, Sacramento and San Francisco.

Two markets—Jacksonville and Minneapolis—are projected to have peak completions in 2020.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.