The possibility of overdevelopment in this current apartment boom has been debated a lot over the past year. Go to a conference or listen in to a REIT earnings call and you’ll likely hear a question and ensuing commentary on development, which construction jump 21 percent to an annual rate of 241,000 in February. And, the answer’s often the same--the capital sources (i.e., debt and equity) aren’t providing enough funding to allow many markets (other than maybe Washington, DC and possibly Seattle) to become over supplied (it’s funny that developers need outside sources to tell them a market is too hot, instead of figuring it out themselves, but that’s for another blog).
For the first time in a while it seems the over development debate is creeping into the mainstream media. Earlier this week, The Orlando Sentinel (in a state where oversupply is always a concern) reported that local developers suddenly had concerns about overbuilding. The quote “"We always overbuild something. This time will probably be multifamily,” pretty much summed up the sentiment. It then cited a couple of new projects, the lingering single family overhang, and The Florida Housing Finance Authority deciding to hold off new projects in 37 counties as reasons for concern. All of these arguments have merit (though, as the paper acknowledged, there may have other reasons, namely lacking of funding, behind the Housing Finance Authority’s decision.
Still, when brokers start going on record saying oversupply could be an issue down the road, you have to acknowledge it’s a legitimate concern.
The Atlantic Cities doesn’t seem that concerned in a new article, citing vacancy rates dropping 7.4 percent in 2009 to 5.2 percent in 2011. Still it quotes a Urban Land Institute's Real Estate Consensus Forecast that says the returns apartment developers are getting falling from 18.2 percent in 2010 down to 8.8 percent by 2014. And then there’s David Lynn, managing director of the real estate investment management firm Clarion Partners, saying at a ULI event that by 2014 or 2015 there will be an "excessive amount of supply."