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Even in the Best of Times for Apartment Rentals, There Can Be Too Much in the Pipeline

By Tim Ahern | August 4, 2016

Even in the Best of Times for Apartment Rentals, There Can Be Too Much in the PipelineFrom a national perspective, new rental apartment construction is sailing along, with an exceptional number of units now underway – buoyed by healthy job growth and strong ongoing demand for rental properties.

But hunkering down for a look at local markets finds some wrinkles in the outlook for multifamily homebuilding, along with temporary challenges for some metro areas that are heading for an oversupply, according to Fannie Mae’s Multifamily Market Commentary for July.

“At a national level, the total amount of new multifamily development underway looks sound,” says Kim Betancourt, director of economics for Fannie Mae’s Multifamily Economics and Market Research group.

“Unfortunately,” she adds, “new multifamily development is just too concentrated. Ten metros – and a handful of submarkets – account for a disproportionate amount of new supply, compared to a more even distribution in job growth. This imbalance is why supply is expected to outpace demand in several submarkets over the next few years.”

Job Growth and Apartment Demand

Moody’s Analytics expects the U.S. economy to generate about 2.5 million jobs in 2016, says Betancourt, which has the potential for creating demand for as many as 500,000 additional apartments.

In its July market commentary, Fannie Mae’s Multifamily Economics team cites statistics from the Dodge Data & Analytics Construction Pipeline showing more than 556,000 apartment rental units under construction as of this June – up from 512,000 in January.

Data from Dodge shows that, after declining steadily over the past several years, the number of condominium units underway has begun to increase. There were 72,000 condo units under construction in June, up from 69,000 six months earlier.

Dodge also shows that major metropolitan areas account for the lion’s share of the country’s multifamily activity. New York leads with more than 100,000 units completed or underway from 2015 through 2017. Washington, D.C., Houston, and Dallas each exceed 30,000 units. Denver, Seattle, and Boston follow with slightly lower volume. Los Angeles, Austin, and Atlanta round out the top 10.

Slowdowns and Oversupply

A few spots face slower rent growth and a slightly rising vacancy rate as the result of overbuilding, according to the July Multifamily Market Commentary. In some cases, rents could edge lower.

“An onslaught of new supply in Houston is somewhat troubling, at least over the short term,” the report says. Responding to today’s low oil prices, the city’s economy is less vibrant than developers expected to find it when they were projecting demand a few years ago. Deliveries of new units are now surging – at a time when demand for rentals is less robust.

The commentary adds: “The longer-term outlook should brighten, however, once these conditions subside and Houston’s multifamily market returns to a healthy growth mode.”

Tech Hype

Austin is somewhat concerning, not necessarily because job growth is slowing but because developers may have overestimated the strength of the city’s high-tech sector. Developers have bet heavily on luring Millennial high-tech workers to the downtown area, but it’s unknown if future job growth will keep fueling demand there.  Many of the new jobs opening up in Austin might not be primarily in the high-tech sector and might not pay enough to support the area’s escalating asking rents.

As a result, Austin’s “apartment market is likely to see some volatility, and a decline in occupancy levels and rents – especially if there is a slowdown or disruption in the high-tech sectors,” says the commentary.

But the picture is far from bleak. “With Millennials continuing to drive strong demand nationally, we expect less than a 1 percent increase in the nationwide vacancy rate this year, despite the supply surge,” the commentary concludes.

Tim Ahern is a writer in Fannie Mae’s Corporate Communications Department.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Multifamily Economics and Market Research Group (MRG) included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the MRG bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the MRG represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.