With 620,000 new units delivered in 2016 and 2017 and more than 600,000 in the construction pipeline, new deliveries are expected to continue to outpace demand in several top metros over the next two years. The markets most at risk of oversupply on a short-term basis are Denver; Seattle; Charlotte, N.C.; Dallas; Phoenix; and Miami, according to the Yardi Matrix U.S. Multifamily Supply and Demand Forecasts by Metro for June 2018.
Yardi expects demand for 135,000 to 145,000 new apartment units per year in the top 30 metros, or about two-thirds of all of the population and multifamily demand in the U.S. Since deliveries are rising above 300,000 per year, occupancy rates can only be maintained under favorable demand and economic conditions if this trend continues, Yardi analysts note.
“Understanding the future demand for rental housing is critical for the multifamily industry. The questions of 'where to build' and 'how much to build' are important not only to forming public policy but for individual developers and lenders, as well," says Paul Fiorilla, associate director of research at Yardi Matrix. "Looking forward, the industry needs to find ways to develop housing that's affordable without overbuilding in a way that disrupts business models.”
The new-construction pipeline is expected to moderate in the long term as new units are completed. Many of the markets at the greatest risk of oversupply in the short term are expected to absorb new units in the long term, given their strong economies and multifamily demand. Developers are also expected to pull away from new projects if their occupancy rates drop too far.
2-Year Forecast
Yardi used population projections and a per-person household figure to predict household growth over the next two- and five-year periods, then multiplied those figures by the current percentage of renters in each of the top 30 metros. To gauge multifamily demand, Yardi multiplied the total number of renter households by the share of multifamily renters as a share of all renters in each metro.
Over the next two years, Yardi forecasts 440,000 units will be delivered in the top 30 metros in response to demand for 290,000 new apartment units. Supply growth will be led by the New York metro area; Dallas; Washington, D.C.; Los Angeles; Denver; and Miami, and the metros projected to have the highest new demand are New York; Los Angeles; Washington, D.C.; Houston; and Miami.
Supply is expected to exceed demand by at least 2.5% in Denver, Seattle, Charlotte, Dallas, Phoenix, and Miami, while demand is expected to exceed supply by 1.0% or more in Los Angeles; the Inland Empire of California; Houston; Sacramento, Calif.; New York; and San Diego.
The occupancy rate of stabilized apartments in the U.S. has dropped about 100 basis points over the past two years, down to 94.8% in April 2018, and is likely to keep trending downward, says Yardi.
5-Year Forecast
Over the next five years, Yardi forecasts 617,000 new apartment units will be added to the top 30 metros in response to demand for 677,000 units. New apartment deliveries in New York, D.C., Dallas, Los Angeles, and Miami will encompass about 250,000 of these units, or 40% of all new development.
New York, Los Angeles, D.C., Chicago, and Houston have the highest projected demand over the next five years, while supply is expected to seek demand in Seattle, Charlotte, Dallas, and St. Louis. Los Angeles, the Inland Empire, San Diego, Houston, and Chicago have the most favorable supply–demand metrics on this time line.
Projects not yet under construction stand a chance of being delayed, especially if demand proves to be weak and occupancies and rents slip. If demand proves strong, however, project time lines may speed up. Yardi’s methodology also assumes that the percentage of apartment renters in each metro will remain constant over the next five years; any difference in actual percentages will affect actual demand.
While Yardi’s forecast is based on current population and homeownership trends, social, demographic, and lifestyle shifts over time could change supply, demand, or rent dynamics in any market or even across the country. For instance, while strong job-market growth has encouraged new household formation since 2010, this could grind to a halt if a downturn were to occur.
Other flash points include:
- The advent of driverless cars and a smaller concentration of cars and drivers’ licenses among young adults;
- The current concentration of job growth in urban centers with educated workers;
- The growth of the gig economy, whose workers are mobile and less likely to qualify for mortgages;
- Changing commuting and lifestyle preferences, which could encourage more “live–work–play” community development within or close to urban job centers;
- Immigration policy, because immigrants tend to create demand in big coastal markets; and
- Land-use trends, including conversions of infill land into luxury apartments.
