Monthly multifamily permit activity has been gyrating like a teenage pop singer of late--rising 17% one month, only to fall 8% the next. Clearer patterns emerge from an analysis of year-long, 2010 permit data. That analysis shows where 2011 development activity is likely to be concentrated. Based on sharp permit increases in many major markets, it looks as though the long-vaunted rise in demographically favored multifamily construction may be close at hand. Some of the largest household growth in this country over the next ten years will be in the 25 to 34 age cohort that's most likely to rent apartments.
On the other hand, multifamily construction has been running at such depressed levels that an increase in activity shouldn't be a surprise. "Multifamily construction activity declined so sharply over the last two years that the current rate of increase is inevitable even in a period of weak employment growth," reads Hanley Wood Market Intelligence's U.S. Housing Market's February 10th Flash Report.
In either case, apartment fundamentals are so strong that Marcus & Millichap, a research and brokerage firm, forecasts that vacancies and rents will increase this year in each of the 44 apartment markets it covers. It says that several years of very light construction activity, which makes apartments scarce and allows landlords to charge higher rents, will help owners recover lost value in their apartment portfolios.
With balance sheets improving and investors eager to make deals, the industry would appear to be in an ideal position to start new projects. If only the decision to build apartments were that easy. Owners and developers continually weigh the cost of building new apartments against buying older buildings and remodeling them, or even investing in their current buildings to potentially raise rents. The availability of financing, particularly construction debt, is another critical component in decisions to develop new apartments. Despite this challenge, investor interest in building new apartments and repositioning existing properties is extremely high right now, according to senior multifamily executives who spoke at the 2011 Vail Leadership Summit hosted by Multifamily Executive, a sister magazine to BUILDER. Optimism pervaded the conference—companies who didn’t put shovel to dirt in all of 2009 laid out plans to ramp up their 2011 pipelines again.
Given that the big players in the multifamily market, publically held REITs, prefer to build in Class A coastal markets, it's no surprise that metro areas such as New York City, Los Angeles, and Washington, D.C. top the list of development hot spots in 2011. But activity is clearly picking up in other traditionally large apartment markets with strong business centers such as Houston and Chicago.
An analysis of preliminary 2010 permit data, courtesy of U.S. Housing Markets, shows where developers are already placing their chips. Here's a list of the 20 largest markets for multifamily permit activity in 2010, along with percentage increases or decreases.
Rank Metro 2010 Permits Increase/Decrease
1 New York-Wayne-White Plains NY-NJ (Div.) 8,305 +2%
2 Houston-Baytown-Sugar Land, TX (MSA) 5,169 +4%
3 Los Angeles-Long Beach-Glendale, CA (Div.) 4,784 +63%
4 Dallas-Plano-Irving, TX (Div.) 3,852 -15%
5 Seattle-Bellevue-Everett, WA 3,692 +57%
6 San Jose-Sunnyvale-Santa Clara, CA (MSA) 3,327 +622%
7 Washington-Arlington-Alexandria, DC-VA-MD-WVA (MSA)2,501 +16%
8 Chicago-Naperville-Joliet, IL (Div.) 2,361 +73%
9 Miami-Miami Beach-Kendall, FL (Div.) 2.265 +331%
10 Indianapolis, IN (MSA) 2.128 +15%
11 Tampa-St. Petersburg-Clearwater, FL (MSA) 2.105 -32%
12 Baltimore-Towson, MD (MSA) 2,067 +7%
13 Fayetteville, NC (MSA) 1,967 +131%
14 Minneapolis-St. Paul-Bloomington, MN-WI (MSA) 1,921 +85%
15 Edison, N.J. (Div.) 1,811 +167%
16 Boston-Quincy, MA (Div.) 1,792 +13%
17 San Antonio, TX (MSA) 1,733 +242%
18 Little Rock-North Little Rock, AR (MSA) 1,715 +38%
19 Oakland-Fremont-Hayward, CA (Div.) 1,634 +137%
20 El Paso, TX (MSA) 1,588 +188%