Strong demand in the multifamily sector is evident as new construction projects try to keep pace with a growing number of renters. But a new report from CoStar Group economists warns that “for vacancies and rents to remain within healthy levels, developers need to dial back new construction after 2015.”
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Since 1990, multifamily starts have averaged 242,000 annually. But in 2014, they surged to 340,000 – the highest level since the 1980s.
Still, vacancies remain at their lowest point in 10 years. New supply in the multifamily sector will likely increase the U.S. apartment vacancy rate up to 5.5 percent by the end of 2015, which should keep rent increases in check, CoStar economists predict.
“The Echo Boom renter cohort ages 20 to 34 is reaching its peak over the next few years,” CoStar economists noted in their Fourth-Quarter and Yearend 2014 Multifamily Review and Outlook presentation. “With a potential increase of 2 million employed people in that group and 1.53 million new younger households, apartment investors will find plenty of demand for new product.”
Today’s renter cohort is expected to take longer to transition into home ownership than any other demographic group of the last 30 years, according to Luis Mejuia, CoStar’s director of U.S. research in the multifamily.
Booming apartment markets – like in Dallas, Washington, D.C., and Houston – each have seen more than 10,000 units delivered this past year alone. Meanwhile, smaller markets like Austin, Texas, and Raleigh, N.C., saw inventories increase by more than 4 percent.
As more new apartment construction hits the market, annual rent growth is showing some signs of slowing. Some newer projects are even beginning to offer incentives, like free rent and other perks, to make sure they’re fully leased.
"Supply barriers will begin to matter more," says real estate economist Francis Yuen. "Ultimately, the primary markets like San Francisco and New York City will outperform because supply will remain manageable, while Denver and Dallas could see apartment oversupply."
Will the multifamily market peak in 2015? Not necessarily.
"As bullish as we hear investors are about pumping money into investments, and many REITs switching to development, it’s possible the construction run could extend well into 2016," Yuen says.