When multifamily permits surged to 436,000 units in April, some observers naturally began to express caution.
Then June’s 309,000-unit figure represented a 10-month low. And now, with permits barreling past 380,000 units, the concerns have grown even louder. In fact, in noting the 23.6 percent increase from June, Raymond James Equity Research characterized the figures as "a negative reading for apartment REIT investors" in a research report.
Supply concern is nothing new for investors. While the industry knows exactly how many units are coming, measuring demand is a much trickier proposition.
“The market tends to be fearful of supply because we’re so smart with supply and we know what’s going to come out of the ground in 18- to 24-months,” says Rod Petrik, real estate research analyst at Stifel Nicolaus and Co. “The market does a terrible job at projecting demand. So until some of these units get delivered and the market sees how it’s going to be absorbed, there’s uncertainty.”
Permit issuance picked up most in the Northeast and South, which saw sequential gains of 18.8 percent and 9.6 percent, respectively. As with everything in real estate, the location of these permits is the most critical factor.
“While too early to confirm a trend, any sustained uptick in permitting needs to be carefully monitored by apartment investors, particularly if new supply continues to be concentrated in ‘urban core’ locations targeting Class A renters,” Raymond James says in the report.
Raymond James says there are 431,000 multifamily units "under construction,” which is the largest backlog since 2008 and, before that, 1987.
“While we expect a significant chunk of that backlog will soon be ready for initial move-in later this fall, strong demand appears ready to absorb the resulting supply surge,” Raymond James says in the report. “Therefore, it seems the better-than-expected rent improvements seen year-to-date will continue.”
Others agree that the market's continued strong fundamentals should run at least through the remainder of 2014.
“In many markets, there is more supply being delivered in the second half of the year than the first,” says Dave Bragg, a managing director with research firm Green Street Advisors. “The apartment market will continue to benefit from job and the weaker housing market and be tested from new supply. Overall, the second half of the year should bring more of the same healthy fundamentals.”
If you combine single-family starts, Petrik argues that there still isn’t enough housing being produced to meet demand.
“In total, between single family and multifamily, we’re still building less than a million units, yet household formation growth is running at 1.2 to 1.4 million on a trailing 12-month basis,” Petrik says. “Creating 1.25 million households, but building less than a million homes would tell me things are pretty good.”