While the multifamily segment remains extremely robust, new development and changes in demand suggest shifting supply and demand curves ahead.
Reflecting its solid expansion, investors have piled into multifamily properties, driving deal volume ahead of the office segment for the first time in more than a decade. However, the new apartment development cycle varies markedly from market to market, with some metros already seeing significant supply additions while development has barely begun in others. This will lead to sharp differences in the direction of vacancies, and potentially investor preferences, in coming years.
The multifamily sector continues to display strong absorption. In fact, preliminary data for the first quarter of 2013 was the 15th consecutive quarter of positive seasonally adjusted absorption. Demand for multifamily properties is no longer being fed primarily by the transition from homeownership to rental, as the homeownership decline appears to be tapering off.
Demand is increasingly fueled by household formations, as the economic recovery has finally engendered a post-recession pop in formations. Amid a tapering of demand, a decline in youth unemployment will continue to drive healthy absorption, as this demographic is far more likely to rent.
But, there has been an influx of new supply in each of the past four quarters, with more than 15,000 units completed in the first quarter of 2013, while the quarter prior saw 27,000 units added, the highest total since early 2010. Multifamily starts have surged back to their pre-recession levels, portending large supply additions in coming years that absorption is not likely to keep pace with.
Despite the swath of completions in the first quarter, vacancies fell to a seasonally adjusted 4.3 percent amid strong net take-up, their lowest level since 2000. The rapid reduction in availability is fueling robust growth in effective rents, which have risen in each of the past 13 quarters to an all-time high, some 3.4 percent higher than a year ago.
The multifamily segment’s shift into a new part of its cycle is reflected in the metros that posted the largest vacancy improvements over the past two quarters as of the fourth quarter of 2012, the most recent quarter for which metro area data is available.
The metros seeing the biggest improvement have generally been housing bust markets, such as Florida’s Jacksonville, Orlando, Palm Beach, and Tampa; Las Vegas; and Phoenix, where development remains muted, allowing still-robust absorption to continue working off excess inventory. Five metros saw vacancies rise over the past two quarters, and six remained flat.
Robust multifamily demand has been evidenced nationwide, as all metros posted positive absorption in the past two quarters. Twenty-two metros saw more than 0.9 percent of stock absorbed over the past two quarters, with San Antonio showing the strongest net take-up with 2 percent of stock absorbed. However, much of this was take-up of new construction, as San Antonio has added 1.4 percent to its multifamily inventory over the past two quarters. Austin, Texas; Nashville, Tenn.; Northern Virginia; and Washington, D.C., which were among the leaders in absorption, had more than 1 percent of stock added as well.
With vacancies low or still falling in every metro, it is unsurprising that all metros are seeing solid rent growth. The Bay Area, Houston, and Seattle have seen the strongest rent gains. Atlanta, Indianapolis, and Phoenix are the only metros that saw gains of less than 1 percent over the past two quarters.
Our national apartment forecast highlights the shift occurring in the supply-demand dynamic.
We expect absorption will simmer down while supply additions will continue to rise, as strong rents and occupancies spur development. This shifting supply-demand dynamic will result in vacancies reaching their cyclical trough in 2015 before beginning to rise modestly. While minimal vacancy improvement will occur after 2014, availability will remain low enough to support robust rent gains.
Apartment vacancies will decline in most major markets this year, though 17 will likely see vacancies remain flat or rise. Those with the largest increases are markets that have seen robust economic growth since the recession, such as Austin; Boston; Raleigh, N.C.; San Jose; and San Francisco. These markets have seen development begin sooner than others owing to their strong multifamily and economic fundamentals.
The metros that will see the largest vacancy declines are markets that have struggled economically and development has not yet begun, including Cincinnati; Detroit; Kansas City, Mo.; and Memphis, Tenn.
By 2016 development will have swung into full gear. While only 18 metros will see vacancies rise by this time, Austin, Boston, suburban Maryland, and San Jose will see vacancies rise by more than 100 basis points. Metros that will see the largest vacancy declines are once again markets that have lagged economically, thereby starting development later, such as Atlanta, Detroit, Kansas City, Memphis, Orlando, Phoenix, and Tampa.
We expect rent gains across all metros, as vacancies will remain low enough even in those with expected increases in vacancies to support rent growth. Fort Worth and San Antonio in Texas, Orange County and Sacramento in California, and St. Louis will see cumulative rent gains of more than 18.5 percent through 2016. Austin, Boston, Cincinnati, Dallas, and Northern Virginia will lag; most of these markets are expected to see larger vacancy increases.
Peter Muoio is the head of Auction.com’s newly formed Auction.com Research.