This article was posted on Saturday, Jun 01, 2013

2013 to See Developers Add Largest – Number of Multifamily Units Since 2009

With continued strong demand for apartments being met by a legitimate multifamily building boom in many U.S.cities, increasing apartment rents are expected to reach something of an inflection point in 2013.
Rent growth in some metros such as Boston, Washington, D.C. and New York is cooling down as those markets are doused by a wave of new supply from developers. Other areas of the U.S., such as the San Francisco Bay Area and Silicon Valley, remain red hot, while in still other markets like Southern California, St. Louis and Salt Lake City, apartment vacancies have tightened to the point where rents are starting to increase again.

By any measure, the apartment sector has enjoyed the strongest rebound of any of the four major CRE property types, and can now be considered fully recovered, observed CoStar Senior Real Estate Economist Erica Champion who, along with Director of Research-Multifamily Luis Mejia and Real Estate Economist Francis Yuen, recently presented CoStar’s latest analysis of the multifamily market as part of a 2012 Review and Outlook presentation to clients.

Overall apartment vacancies have compressed 220 basis points from their late 2009 peak and are 50 bps below the 10-year average. Average rents have risen 3.2% above the prior cycle’s peak, and three-quarters of the top U.S. metros surveyed by CoStar and its economic forecasting firm, Property and Portfolio Research, have fully regained their prior peak levels.

Apartment Supply to Hit 4-Year High

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Developers have taken notice of the tightening conditions and rushed to build new apartments wherever they can. As a result, 2013 will be the first year since 2009 that the number of new apartment units added to the market will actually return to historic average levels. About 140,000 units will enter the top 54 markets this year — actually 30% above the 10-year historical average.

The key demographic for apartment demand, employment among younger Americans under the age of 35, rose sharply in the last few months of 2012, providing a shot in the arm for the apartment market, Champion said. That welcome news prompted surprised analysts to upwardly revise total apartment demand for 2012 by 25%.
CoStar’s baseline expectation is that 2013 job growth will remain at roughly the same level as last year, and apartment analysts will closely monitor how many of those jobs go to young people in as well as consumer confidence in the coming year.

Apartment demand is likewise expected to stay roughly the same or a bit below average as the new supply causes vacancy rates to tick up around the country over the next year.

The usual suspects — resilient, high-population growth markets in technology and energy bastions like Raleigh, NC; Seattle and Texas metros — again led apartment market growth in 2012. But this time, the good news didn’t stop there.

“What we’re starting to see is evidence of a more broad-based recovery starting to propel renter demand growth in some of the housing bust metros,” including Phoenix, Atlanta and a handful of Florida markets such as Palm Beach County, Orlando and Fort Lauderdale, Champion said.

With construction starts and permits picking up rapidly since 2010, a wave of new apartment supply is deluging markets that recovered early in the cycle such as Dallas-Fort Worth, Houston, Washington, D.C., Denver, and Seattle. Those markets will see some of the steepest jumps in vacancy in 2013.
In total, about 183,000 units were under construction in the 54 largest metros at the end of 2012 — a 66% increase over a year earlier, with many of the projects breaking ground in the fourth quarter. As job growth has gained steam, developers have even moved off the sidelines in markets like Phoenix and Atlanta, which to date has seen only modest levels of new supply.

As new supply enters the market,Seattle,Boston andWashington,D.C., which faces the additional pressure of federal spending cuts, are all starting to feel vacancy pressure. The coming supply wave will cause vacancy rates to tick up in 32 of the 54 largest metros in 2013, CoStar predicts.

Rents Gains Moderate As New Supply Hits

Those vacancy increases are starting to temper the strong rent growth of recent years, at least in some coastal metros. Others are still seeing red-hot rent growth. Tech oriented metros and some Texasmarkets had very strong cumulative rent growth coming out of the recession. The San Francisco Bay Area and Silicon Valleyposted double-digit year-over-year gains for two consecutive years.

Over the last couple of quarters, rent growth has been “a lot more sane,” and CoStar expects that moderation to continue, Champion said.
In fact, in certain primary markets such as New York, D.C. and Boston that experienced the earliest rent growth and apartment construction, landlords’ ability to push rents is waning considerably. Other markets where vacancies are starting to tighten such as Los Angeles, St. Louis, Salt Lake City, San Diego and Memphis will likely see rent growth heat up this year.

Transit-accessible properties, particularly newer properties of 100 or more units with urban amenities, which will enjoy stronger occupancy effective rents than properties not located near mass transit.

Apartment, Single-Family Markets Can Peacefully Coexist

The apartment market is also facing potential effects of the single-family market recovery, Mejia said. While recent signs of improvement in the single family sales market can attract current renters to the for-sale market, the same factors can also benefit multifamily landlords and owners, he said.
“Growth in single family sales can coexist with growth in apartment rents, especially in economies that enjoy positive employment trends,” Mejia said.
Likewise, the trend of investors showing increasing interest in buying single-family units for re-deployment as rentals also has the potential to affect the apartment market, Mejia added.

“These single-family units are not perfect economic substitutes for apartments,” Mejia explained. “For one, they typically serve the needs of larger households who may have already owned a single family home and would not necessarily consider renting an apartment.

Single-family rentals could actually serve as a complements to traditional apartment rental options, especially in markets where the transition from renter to homeowner appears to take longer, he added.

CoStar Group, Inc. (NASDAQ — CSGP) is commercial real estate’s number one provider of information and marketing services to the commercial real estate industry.

Founded in 1987, CoStar conducts expansive, ongoing research to produce and maintain the largest and most comprehensive database of commercial real estate information. Headquartered in Washington, DC, CoStar maintains offices throughout the U.S. and in Europe with a staff of approximately 1,500 worldwide, including the industry’s largest professional research organization. For more information, visit  Reprinted with permission.



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