Coming out of the recession, Raleigh-Durham, N.C., seemed to be one of those can’t-miss real estate markets. Its economy and demographics were exactly what builders, developers, and investors coveted in terms of potential growth. And competitive conditions seemed ripe for the picking.

So the gold rush began, and aggressive construction of multifamily apartments followed. Maybe a bit too aggressive, say some industry watchers, who uniformly identify Raleigh-Durham among the handful of go-go markets whose building activity might be getting ahead of demand.

No one is ready to utter the word “overbuilt” yet, either about Raleigh or other hot construction markets such as Austin, Texas; Charlotte, N.C.; or West Palm Beach, Fla. It’s a matter of degree, as Raleigh’s economic growth just hasn’t been as blistering as investors and developers anticipated, says Greg Willett, vice president of research and analysis for MPF Research. He notes, for example, that over the 12 months, the Triangle region that includes Raleigh has added about 10,600 jobs, which were down from the same period a year ago.

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MPF estimates there are 9,626 multifamily properties under construction in Raleigh, which when completed would increase that market’s existing inventory by 7.7 percent. Looked at a different way, construction of multifamily buildings with 40 or more units in Raleigh-Durham for the years 2013 and 2014 combined will be 111.1 percent of net absorption, according to Brad Doremus, a research and economics associate with Reis Inc. Over a five-year period, Raleigh’s new apartment supply is forecasted to add 3.8 percent annually to existing inventory, according to CoStar’s PPR Multifamily.

That 3.8 percent is a hefty increase when compared to history. “To put this into perspective, the PPR54 average for supply growth is 1.2 percent,” says Francis Yuen, PPR’s real estate economist.

First In, First Frothy
Yuen and other industry watchers point out that markets that recovered from the recession first are the ones most likely to be frothy on the new construction side. However, markets such as Austin (whose 16,668 new apartments would, when completed, add 7.8 percent to that market’s inventory, according to MPF Research), Denver, and Dallas can sustain some overbuilding. “They had been at or near all-time lows” for multifamily supply coming out of the recession, explains Yuen.

But gauging the temperature of any market’s construction activity can be more art than science. Take Washington D.C., where MPF estimates 20,153 new apartments are under construction. When completed, those apartments would increase D.C.’s existing inventory by 3.8 percent, which Willett concedes would ostensibly signal a market out of balance. But Willett remains convinced that any overbuilding are temporary situations in both Washington and Raleigh because “they’re very attractive long-term investment markets, due to their healthy overall economies and great renter demographics.”

MPF also expects construction to cool in Austin and Charlotte (where new building activity would add 5.5 percent to inventory growth). If their current construction levels accelerate, a correction would be in order. But even if that happens, Willett sees those markets’ long-term outlooks as “very positive.”

And why not, as demand for multifamily housing is showing no signs of abating? In the 82 metros that Reis tracks, 31,973 units were absorbed in the second quarter, during which 26,584 units were completed. “New units continue to be absorbed as they come online,” Doremus says. Reis projects nationwide deliveries to hit 135,342 units in 2013 and 169,376 in 2014 within new buildings with 40 or more units.

MPF found the same dynamic when it stated, earlier this month, that demand for apartments in general in the country’s 100 largest markets rose 69 percent in the second quarter to 88,524, “well surpassing the 33,291 apartments in communities finished during the April to June time frame.”

“We’re seeing a pretty good return in new starts,” says Mark Obrinsky, chief economist for the National Multi Housing Council. But even at a projected 250,000 annual starts, Obrinsky thinks the national market needs to get up to 300,000 “to keep pace with demand.” And when he looks at a market like Washington D.C., he doesn’t see overbuilding so much as “the new supply is being compressed into the next 24 months. I’m not even sure that’s ahead of demand.”

Yuen, though, isn’t buying this optimistic take on D.C. “It’s either overbuilt or it isn’t. What people seem to be saying is that developers will lose their shirts, but only for a little while.” He also notes that PPR hasn’t seen this level of construction activity nationwide since the tech boom, when apartment deliveries were averaging 193,000 per year. “What’s surprised us is how quickly people are moving into markets. You can’t track supply fast enough."

Problem Child
Yuen and other industry watchers agree that the real problem markets are few and far between. One of these is definitely Atlanta, whose employment base is the same size it was 10 years ago but where 100,000 apartments and 400,000 single-family homes got built during that period.

“Atlanta is going to be chronically overbuilt for a while,” says Willett. He also thinks Jacksonville, Fla., bears keeping an eye on because its current pace of construction would add nearly 4 percent to existing apartment inventory, even though occupancy levels are relatively weak and rent growth is in neutral.

On the flip side, several markets remain underserved. Leading that list are Oakland, Grenville, S.C., St. Louis, and even Las Vegas and Phoenix, where some observers expect apartment construction to rev up in the next few years.

And then there’s Pittsburgh, whose economic recovery over the past decade has been well reported. Right now, “people don’t seem to be racing there,” says Yuen, partly because geographic and tax hurdles make it difficult to find land at the right price. Still, Reis puts Pittsburgh at the top of its list for construction as a percentage of net absorptions through 2014.

John Caulfield is senior editor for MFE’s sister publication Builder.