Buoyed by healthy debt markets, strong rent projections and solid returns, new apartment supply has steadily increased over the last handful of years. However, supply levels in some markets may have finally gotten a little out ahead of demand.
Executives at the 2018 NMHC Apartment Strategies Outlook Conference reported slower absorptions, rising vacancies, weak rent growth and more concessions. In response, capital providers are pulling back and multifamily investors are finding it much harder to find new development deals that pencil much less close.
The question of which markets are likely to most affected-as well as what markets might buck the trend-was a hot topic of discussion for a panel featuring Jeff Adler, vice president of Yardi Matrix; Jay Lybik, vice president of research services for Marcus & Millichap; Mark Obrinsky, chief economist and senior vice president of research for NMHC; and Greg Willett, chief economist at RealPage.
According to data from Yardi Matrix, the final tally on new apartment completions for 2017 will be ahead of 2016 levels but short of the 360,000 new units forecasted for the year, as construction delays slow production. However, this means that even as fewer projects will be going into the pipeline in 2018, deliveries in the year ahead are going to get a decent boost to an estimated 335,000 units before levels moderate in 2019.
However, Willett noted that this expected nationally might not occur in certain metros with consistently hefty demand. Lybik added that deliveries are likely to be super concentrated, with the top ten markets accounting for roughly 85 percent of all deliveries in 2018.
Dallas-Fort Worth and New York are expected to top the completions leaderboard, each adding at least 20,000 new units to the local inventory. However, in terms of biggest increases as a percent of stock, Northern New Jersey, Denver, Dallas-Fort Worth and Atlanta should lead the pack.
On the flip side, market watchers are expecting very little activity in markets like St. Louis and Cleveland but also places like the Inland Empire, Indianapolis and Baltimore, which panelists said was more surprising.
“When you look at the bottom 10 list, these markets are amazingly tight. I’m talking about Vegas, Sacramento, Detroit-just look at vacancies,” said Lybik. Moreover, he noted that Sacramento and the Inland Empire, along with Denver and Los Angeles, had some of the strongest annual rent growth in 2017.
Panelists also remarked on the amount of compression in the range of performances across metros, meaning that annual rent growth spreads between metros has slimmed down significantly, and suggested that workforce or blue-collar neighborhoods may deserve a closer look.
However, panelists also gave a word of warning to owners of Class A properties whose strategy in the near term may involve wooing Class B renters to upgrade. That might be effective in markets like Las Vegas, where the rent gaps between Class A and Class B are narrow (around $147), it’s going to be a challenge in Boston, New York or Chicago, where the gaps are $900, $1,000 or more.
“Class A owners,” said Lybik, “Your market is a little more isolated that maybe you thought. What it’s going to take to pull that Class B renter up to fill your vacancies is probably going to be harder than you think.”
Check out the more detailed data in the full presentation here.