The multifamily industry has attracted its share of investors and development activity since the Great Recession. With several years of rent growth and an improving financial environment, it seems like the perfect time for developers to set up shop in up-and-coming-markets.
So much so that non-traditional industries are attempting to stake their claim in the multifamily world. But the increased interest will inevitably threaten to oversupply some top markets that are already seeing an increasing wave of new production.
“Traditional, multifamily developers might be underestimating the magnitude of the threat of new entrants, which are increasingly announcing their own multifamily development plans,” says Dave Bragg, director of research at Cleveland-based Zelman & Associates.
Particularly, some very large single-family builders, such as Miami-based home builder Lennar, have muscled into the space. Lennar plans to soon break ground on a multifamily community in Jacksonville, Fla., and has another deal in the Atlanta suburb of Johns Creek.
Bragg adds that other REITs in the office and retail sub sectors are similarly slipping into the multifamily business, at a time “when the supply figures have already been escalating.”
“Nationally, the numbers are increasing at such a rate that it should become a greater concern,” he says.
Some smaller markets that might fare better against the influx of new developments are those that are just recovering and have seen little action since the housing bust. Bragg suggests markets in Atlanta, Phoenix, and Las Vegas should become a greater focus for new entrants.
“I think these are three markets where developers, whether they’re longstanding developing partners or new entrants, can feel more comfortable putting the shovel in the ground because there has been little new permitting activity thus far in this recovery,” he says.
On the other hand, Washington, D.C., Raleigh, N.C., Austin, Houston, and San Jose, Calif. will all be facing a larger supply threat in the next two years. And the oversupply is only the preliminary threat of new developments, as it will continue to lead to negative rent growth.
“It’s hard to predict, but it will contribute to a continued deceleration of rent growth, which has already begun for those markets,” Bragg says.
