The apartment industry’s dramatic recovery over the past several years, causing noteworthy spikes in permitting and construction activity, has led to speculation about a potential multifamily housing bubble. However, industry experts were in general agreement that the fears are largely overblown.
True, nationally, multifamily permits have logged significant year-over-year gains, and many of the biggest apartment markets are permitting at rates well above historical norms, but by and large, experts said the activity was a reflection of an industry playing catch up after years of chronic underproduction.
Demographics analysis suggests the industry needs to produce at least 300,000 new units annually to meet apartment demand. Not only is the apartment industry just beginning to approach that level of production following several years of significant underproduction, but demand levels are set to increase steadily over the next few years.
The number of young people turning 18 is roughly at equilibrium with the number of people turning 50, meaning growing demand could come from new household formation as well as Baby Boomers beginning to downsize. In addition, many young people who have waited out the recession living under mom and dad’s roof are beginning to strike out on their own-and likely will begin their independent lives in apartments.
“We’re going to see a lot of pent up demand in some markets really uncoil,” said Michael Gately, managing director of the Research Group at Cornerstone Real Estate Advisors. “The confluence of these two demographic cycles is a pretty strong and compelling argument for growth in apartments. It’s not going to play out in the next year or two, but over the next five to 10 years.”
In addition, the existing apartment stock is aging. In fact, 78 percent of the nation’s 50+ unit properties were built prior to 1990; two-thirds was built before 1980, suggesting that the inventory is in need of not only expansion but also refreshing.
However, the hyper concentration of new development activity in the urban cores of the biggest metro markets and the proliferation of the luxury high-rise product type is causing some industry insiders to question whether developers are building too much of the same kind of product in select areas, creating a somewhat lumpy supply pipeline against wider-spread demand.
Many feel this could create a temporary issue that the industry will work through rather quickly. “This first wave of development in these growth centers has been high-end, high-rise product and you’re already seeing some slower rent growth now,” Gately said. “[But] I think that’s a near-term imbalance that will play out.”
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