The question is, will the number of apartments being built outstrip demand? Even as more millennials join baby boomers in the apartment market, there is some concern that oversupply could become a problem. But others feel this cycle has a lot of runway remaining.
Alliance Residential, the industry’s No. 1 builder in 2013 and 2014, plans to start 8,000 units in 2016, with a strong focus on Seattle; Portland, Ore.; and Northern and Southern California. That’s 200-plus more starts than the firm did in 2015.
Boomer demand is also helping drive the Phoenix-based company’s growth. As Alliance Residential president and COO Jay Hiemenz notes, boomers are switching lifestyles, “continuing to move back into the cities, selling the bigger houses in the ’burbs.”
Within the next three to five years, Patterson is confident, millennials will have to move out of their parents’ homes and start households of their own. And when they finally do, he expects there to be a few familiar faces.
“When they go to these communities to lease apartments,” says Patterson, “they’re going to be running into their parents. The boomers are going to be there at the same time. I think that’s going to create a groundswell for the multifamily industry that we’ve never seen in my entire [33-year] career.”
Too much supply?
“Too much would mean they’re building new units and they can’t get them leased up,” Obrinsky says, “or they can get leased up by bringing on lots of concessions. So far, that hasn’t been the case.”
Ryan Severino, senior economist and director of research at commercial real estate research firm Reis, feels differently. “We’re definitely developing too many Class A properties and not enough Class B, C properties,” he says.
“They’re developing in an environment where we’ve already seen vacancy going up,” Severino adds. “Between the first quarter of 2013 and the third quarter [of 2015], Class A vacancy went from 4.6% to 5.7%, so that’s a 110-basis-point increase, and that’s before we get the glut of new supply that’s going to be coming on line.”
Severino would like to see just 150,000 to 170,000 new units come to market this year, but he predicts the actual number will be in the low 200,000s.
“I don’t think it’s a massive overbuilding situation,” he says, “but I do think you’ll see vacancy nationally drifting higher over the next four or five years.”