The multifamily sector will soon set a record for new construction, with more than 77,000 units delivering in the third quarter, adding to the 200,000-plus units delivered in the prior four quarters, including many still in the lease-up stage. The wave of supply is putting upward pressure on vacancies, which increased by 10 basis points in the second quarter, to 5.5 percent. While this is still low by historical standards, the pressure on the market will only build in the coming quarters.
It is still early in a supply wave that will increase the total stock of the multifamily market by 3.6 percent from 2014 to 2015. The pace of new construction will more than double the market’s historical average and should handily outpace absorption, pushing vacancies back up to 6.0 percent-6.5 percent by the end of 2015.
In the aggregate, this should be enough to slow the pace of rent growth to less than 2 percent annually for the next few years. However, the impact will be far more acute in certain markets. Austin, for example, will see its inventory increase by more than 10 percent between this year and the next, and local market vacancies will likely explode from less than 6 percent to 8.5 percent. In fact, Austin’s supply wave kicked off earlier than in most cities, and if we include 2013 deliveries, the cumulative growth in stock by 2015 will be 15 percent (and vacancies will have risen from a nadir of 4 percent in 2013). Despite a fantastic demand story, the supply pressure on this market will soon show up in falling effective rents and moderate value losses.
Austin is not the only outlier: Seattle, Raleigh and Charlotte, N.C. will also see multifamily inventory jump by 10 percent from 2014 to 2015, and Denver, Colo., Salt Lake City, Utah, Nashville, Tenn. and San Antonio, Texas will not be far behind. Larger markets, including Houston, will also see unprecedented growth of 7-plus percent during this time period, and vacancies are likely to climb by three percentage points as a result.
There are other markets where new supply is not as shocking, and perhaps some might benefit from more supply. So in that sense, there is room left in the development cycle. But for markets highlighted here, the multifamily development wave is cresting and market pricing will likely soon shift as a result.