Multifamily Construction Slows but Demand Isn't Going Anywhere
Q4 U.S. and Atlanta Market Update
The vacancy rate limbo continued through Q4 for multifamily. How low can you go? If you’re the apartment market, the answer is “pretty low.” The national vacancy rate to end 2016 was 4.1% in Q4, (down from 4.2% in Q3 and 4.3% at the end of 2015). However, this may really be as low as apartment market vacancy can go. If you’re just looking at vacancy, you may think multifamily performance is unstoppable, but there are other indicators to consider.
National vacancy rates do not yet reflect the changing tide. Net absorption in Q4 was the lowest level in more than two years and new construction has officially slowed from a breakneck pace over the past few years. Despite the fact that new construction is expected to exceed demand, REIS predicts that there will not be a spike in vacancy rates.
U.S. net absorption was 44,583 units in Q4, bringing the total for 2016 to 200,187 units, (down from 201,478 units in 2015), according to REIS’ Q4 2016 Apartment Trends report. There were 195,734 new completions in 2016, compared to the 210,272 units completed in 2015. REIS predicts that completions will climb back up to 205,800 units in 2017 and then will begin to fall rather significantly in 2018.
Essentially, even though it stands at a lower level, net absorption has remained healthy even as new construction slows. “This means that prospective home buyers have not abandoned the apartment market as rapidly as many had thought would do so by this stage of the expansion,” said REIS. The number of family households grew by 0.5% in 2016 and 0.4% in 2015. The number of nonfamily households grew by 1.8%, down from 2.3% in 2015, according to the Census.
During November 2016, “total multifamily permitting activity fell 14.5% from October 2016 and 19.8% from a year prior, according to preliminary data from the U.S Census Bureau,” reported MPF Research. A total of 31,300 units were approved for construction in November. This brings year-to-date completions down -10.1% to 370,100 units.
Rent growth also decelerated in Q4 to 0.3%. In addition, REIS calls the most “noteworthy” find of the Q4 2016 data the fact that 13 metros posted an effective rent decline in the quarter. According to Axiometrics, this decline in rent growth is the Number 1 story for the 2016 apartment market and larger markets are to blame. Year-over-year, asking and effective rent growth was 3.7% and 3.3% respectively.
“With rent growth slowing down nationally and interest rates on the rise, many sellers are taking profits off the table and selling in this stage of the cycle,” said Scott K. Spalding, V.P. of The Apartment Group at Bull Realty.
It’s not all bad. In spite of these seemingly somber statistics, 36 of the top 120 apartment markets recorded rent growth above 4.0% in December, according to Axiometrics, who said: “Though most of these are smaller markets, it’s a signal that the apartment industry is still flourishing in many places throughout the country.” And looking at the yearly data, only 2 metros, (New York at -0.4% and San Francisco at -1.5%), showed an effective rent decline compared to 2015.
One of those flourishing smaller markets is Atlanta. In Atlanta, vacancy declined by 40 basis points in 2016, ending the year at 3.7%. In Q4, the city experienced an effective rent growth of 1.1% to an average effective rent of $979. The city was Number 6 for annual asking rent growth at 7.1% and Number 5 for annual effective rent growth at 6.8%.
“Demand for intown vintage and garden style apartments remains strong in Atlanta. Stabilized cap rates remain around 6% for these assets with rents remaining strong and still increasing in some pockets,” said Andy Lundsberg, Partner at Bull Realty.
And while nationally speaking multifamily permitting is down, here in Atlanta, there has been a 33% increase year-over-year in units permitted earning the city a Number 5 spot on top metros for multifamily permits YTD, according to MPF Research.
REIS has a positive outlook, stating that apartment demand in the next couple of years will stay consistent if job growth remains at its current levels. 156,000 jobs were added in December and the unemployment rate was 4.7%, according to the U.S. Bureau of Labor Statistics. Atlanta is the top 3 market for annual job gains with 68,200 jobs added in the past 12 months ending in November (the last metro data available). Perhaps of even more importance to the apartment market, job growth at the metro level continues to exceed job growth at the non-metro level.
Yardi Matrix also expects for most metros to continue to enjoy positive fundamentals. They also expect national rent increases to be “just under 4%, which is above the historical trend of 2.3% and a signal that the market is healthy overall.”
“The apartment-market moderation of 2016 was expected and is just part of the normal cycle. It just means that the next rise is that much closer,” said Axiometrics.
Keeping with the limbo theme, multifamily is still a good wedding date, they just may be out of party tricks.
Bull Realty, Inc., Research