Demand for apartments remains strong and steady, but industry leaders at the 2014 NMHC Apartment Strategies/Finance Conference spent a lot of time discussing the supply side of the market equation. Following years of underbuilding during the Great Recession, the industry is making up for lost time and limited new supply. Debt capital is flowing freely to the sector, fueling new apartment construction activity. While a rebound in permits, starts and deliveries is needed to address a systemic apartment shortage, the rapid rates of acceleration in select metro markets have generated concerns about imbalances in the market.
According to Greg Willet, vice president of MPF Research, the industry is on track to deliver roughly 339,000 new apartments in 2014. While this is slightly above long-term trend, he said overall apartment demand continues to mirror the increasing completion volumes, keeping occupancy rates very full at around 95 percent.
“If you look at the national number, it’s a somewhat aggressive number relative to where we have been, but we’re okay doing that for a while,” he said. “I don’t know that we want to sustain that for another two or three years, but for now, we’re okay.”
That said, Willet also noted, “But you do have some spots that are as aggressive as I’d like to see it.”
Similarly, Ron Witten, president of Witten Advisors, said he expected starts to peak in 2014 thanks to a combination of rising construction-related costs and less equity available to help lock in construction financing, but he also expected demand to keep the market active at a significant level. “Demand and net completions should be roughly in balance through 2016,” he said.
More significant perhaps than the overall level of new construction activity, however, is a shift in where the building is happening and the type of apartment product being built. Whereas much of the new product delivered to date has been expensive, high-density, high-rise product in downtown urban cores, today’s pipeline includes more suburban and more affordable product.
“If there’s anything I see in these latest numbers in construction activity, it’s that starts are starting to spread,” Willet said. “We’re not all building the same thing. We’re seeing more suburban and more affordable product. ... We’re moving into that next phase of the cycle, and we’re actually building the product that we should be building.”
Willet said that middle market product has been largely ignored as the recovery has accelerated, although there’s a big need for it. “The middle market is jam packed,” Willet said, noting that vacancies have been very tight and rent growth has been strong in that tranche of the market.
Jay Denton, vice president of research at Axiometrics, sounded a similar note, pointing to shifts in annual and effective rent growth trends for urban and suburban markets in key metro areas. “Urban cores have weakened for a variety of reason-supply is one,” Denton said.
However, Denton noted that while deliveries are trending up in the suburban markets, there’s still been a significant amount of suburban construction activity during the past few years. “There’s actually been more product delivered in the suburbs, but it’s not as concentrated, so it’s not as noticeable,” he said.
But even as demand and supply look to be in balance for the next couple of years, many apartment executives are evaluating new development deals with a good degree of scrutiny.
“When you look at the cycle, we are in that phase where we are in a mistake mode,” said Jeff Daniels, managing director for AIG Global Real Estate Investment Corp. “You really have to pay attention to what you’re doing because this is where mistakes start to happen. You’re building into a totally different dynamic than what you are delivering into. You have to be critical of your whole portfolio for the next three to five years.”