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Multifamily Development Projected to Reach Four-Year High

03/04/2013 | By Carisa Chappell

Multifamily Development Projected to Reach Four-Year High
As development in the multifamily sector ramps up, analysts are projecting that 2013 will see the largest wave of new apartment supply come online in four years.

This will be the first year since 2009 that the number of new apartment units added to the market will return to historic average levels, according to estimates from commercial real estate research firm CoStar. Luis Mejia, director of multifamily research with CoStar, said he’s expecting a “significant” increase in new supply in the next three years in the more than 50 metro markets covered by his firm. CoStar is projecting that 140,000 new apartment units will be delivered in 2013, with more that 400,000 to come in the next three years.

Mejia attributed the increase to a number of factors, including growing demand among the prime renting demographic. Also, he said developers can easily finance construction loans.

Some markets that recovered early in the real estate cycle got a head start on new construction, according to Mejia. They include Dallas, Washington, Denver and Seattle. Such markets may begin to see higher vacancy rates in 2013 as they become saturated with new units.

“So the bubble is the wild card in the equation, especially if the combination of relatively easy financing and developer’s optimism, which is always there, continues to persist too long,” Mejia explained.

Andrew McCulloch, managing director with Green Street Advisors, said rent growth overall remains healthy across most markets. However, new supply along with tepid income growth and renters moving out to buy homes are causing some moderation.

“We have not seen anything to change our view that apartment demand remains healthy, but is nonetheless continuing to moderate,” noted McCulloch. “Rent growth in 2013 is still expected to be strong on an absolute basis versus long-term trends, as well as on a relative basis versus the other major property sectors.”

Mejia said landlords in high-tech metropolitan markets continue to see rent growth.

“San Francisco is one example where supply constraints are going to keep the rental growth to a positive high,” he said. He added that metros experiencing rapid population growth such as Austin and Raleigh will also benefit from the added supply of new apartment units because of the strong demand.