Multifamily Q3 2016: Developers Stop Sprinting

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U.S. and Atlanta Market Update

It seems developers are finally reacting to the high volumes of construction we’ve been seeing for multifamily. Over the last 12 months, the total number of units completed was 193,660, which is a decline from Q2’s 12-month figure of 198,232, a number “reminiscent of the 1980’s savings-and-loan boom.”

Multifamily housing starts have also slowed. What may not be obvious is that this is a healthy, good thing for a multifamily market that simply had an unsustainable pace. Developers are still running but at least they have stopped sprinting.

“At the end of 3rd quarter 2016, more than 555,000 apartment units were under construction in the top 100 U.S. metros. That figure, up 16.5% from August of last year, was roughly 90% higher than the 20-year average,” reported MPF Research.

For the sixth consecutive quarter, new construction exceeded net absorption but only by a slim margin, according to REIS’ Q3 2016 Preliminary Apartment Trends report. In Q3, 37,744 new units were delivered and net absorption was 37,693 units. Despite expectations that it would rise, the vacancy rate was unchanged at 4.4% this quarter. Ten markets have a vacancy rate below 3%, compared to only eight in Q2.

In Q3, asking and effective rents both grew by 0.9%, which is another indicator of a healthy apartment market and corresponds with forecasts. Although, rent growth has decelerated this year, as opposed to 2015, year-over-year, asking and effective rent growth was 3.8%. Also, the gap between asking and effective rent growth has not widened this year, which shows that landlords “remain confident that conditions will continue to improve in the wake of stronger job growth,” according to REIS.

“Year-over-year rent declines in some of the nation’s highest-priced apartment markets continued to affect overall national apartment market performance,” reported Axiometrics. Rent levels declined year-over-year in the three major markets with the highest rents – San Francisco, New York and San Jose. The average effective rent nationwide was $1,289 per unit per month, compared to $1,251 in the third quarter of 2015.

REIS expects new construction to continue to outpace net absorption, vacancy to increase and rent growth to continue to stay below 4% on an annual basis. However, demand will remain strong due to job growth which will prevent any dramatic increase in vacancy. More than 2.3 million jobs have been created over the last year, and the monthly average year-to-date through July was 186,000, according to Yardi Matrix's U.S. Multifamily Fall 2016 Outlook.

Since Atlanta was a little late to the recovery, the city is still enjoying a development heyday. In Atlanta, vacancy declined 10 basis points to 4.7%. With an annual asking rent growth of 7.2% and effective rent growth of 6.9%, the city ranked 3rd and 4th respectively, according to REIS.

Atlanta was 4th on the list of top metros for multifamily permits year-to-date in August 2016, according to The U.S Census Bureau. Atlanta also remains one of the Top 5 annual job gains markets with 71,000 jobs added in the last 12 months (ending August 2016). 

Bull Realty, Inc., Research