Ripples from Apartment Supply Wave Beginning to Impact Market Fundamentals

Vacancy Rate Expected to Rise Another 50 Basis Points By End of 2014, According to CoStar Forecast

Multifamily construction increased 8% in July, continuing a yearlong upward trend, with several large new projects starting last month, including a $350 million multifamily tower in Queens, NY; a $260 million condominium tower in Honolulu and the $160 million residential portion of the $300 million mixed-use building in Los Angeles.

According to U.S. Census Bureau numbers released this week, multifamily spending in the residential sector increased a slender 0.2% between June and July, rising from $43.2 billion to $43.3 billion. But the most significant story is the year-over-year comparison: spending improved 41% from July 2013.

New York City, Washington D.C., Los Angeles, Miami and Boston remained the top five metropolitan areas ranked by the dollar volume of new multifamily starts through the first seven months of 2014.

The apartment-building boom will continue through at least next year, according to an early survey of CRE executives' sentiments for 2015.

Asked how much development will commence in the U.S. in 2015, respondents to the Commercial Real Estate Outlook Survey released Wednesday by tax advisor KPMG LLP identified multifamily as the top construction sector, with 53% expecting a "significant amount" of new product to launch, up from 43% in last year's survey.

"The rapid migration of young adults and baby boomers to urban areas coupled with displaced homeowners following the housing crisis remain key drivers of multifamily housing development," said Greg Williams, national leader of KPMG's Real Estate practice. "Though investment opportunities exist, real estate executives should be mindful that the growth potential of multifamily housing could wane given the large influx of capital the sector has already received, driving prices up."

Vacancy rates in the 54 largest markets tracked by CoStar Group remain at a 10-year low. However, the trend has clearly begun to reverse course. The national vacancy rate has risen roughly 30 basis points over the last three quarters to about 5.5% as supply has overtaken demand, and CoStar is forecasting another 50-basis-point rise in vacancies through the second half of 2014. New supply, rather than diminished demand, is driving the vacancy rise, real estate economist Francis Yuen noted during the recent CoStar Midyear 2014 Multifamily Review and Outlook, co-presented with CoStar director of U.S. research, multifamily Luis Mejia and quantitative analyst Mark Hickey.

Apartment developers delivered roughly 170,000 units last year with an additional 260,000 units scheduled to be completed by the end of 2014, CoStar data indicates.

Multifamily starts and permits are well above historic levels nationally and continue to trend upward, and markets like Dallas, Houston, Seattle and Washington, D.C. have each logged more than 10,000 deliveries. In the first two quarters of 2014, construction started on more than 160,000 apartment units, putting the nation on pace to exceed last years 290,000 starts.

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Ripples from Apartment Supply Wave Beginning to Impact Market Fundamentals