Social Icons Superfish

Apartment Supply Remains In Check … Except Where It Isn’t

02/22/2013 | By Hans Nordby

Published January/February 2013

Since 2010, the apartment sector has been on a roll, in terms of occupancy gains and rents, which has driven returns through the roof. Combined with sale prices often in excess of replacement costs, these favorable economics have forced Adam Smith’s invisible hand into building apartments. Apartment construction is no longer a nascent trend, as supply additions will be back up to relatively normal levels in 2013, and make no bones about it – there are many markets with excessive new construction today, and many more coming.

New construction will begin to push up apartment vacancy rates in some submarkets in 2013, a trend growing even more pronounced in 2014. Indeed, as the chart below shows, about 20 percent of submarkets tracked by PPR had rising vacancy rates in the second quarter of 2011, climbing to 30 percent in the third quarter of 2012. In these submarkets, quarterly deliveries as a percentage of inventory increased from 0.1 percent to 0.25 percent (0.4 percent to 1 percent of inventory on an annualized basis).

"New construction will begin to push up apartment vacancy rates in some submarkets in 2013."

Poster children for especially high levels of supply include the central and CBD submarkets in Austin, where more than 2,000 units are underway, and the far west side of San Antonio, which boasts Texas-size inventory additions of more than 1,700 apartments in the Westover Hills and Briggs Ranch neighborhoods. In North San Jose’s Oak Creek micromarket, almost 3,000 apartments are underway. In each of these cases, vacancies are expected to rise with the projects, until supply slows in 2014 and beyond and the markets tend toward equilibrium vacancy rates.

Does that mean that apartments are a bad investment? Not at all. Over half of the submarket clusters PPR tracks nationwide have less than 1.0 percent of the inventory underway, so few oxen are being gored here. However, it does mean that market, submarket, and street-corner selection are far more important than they were in 2010, when the only rising tides to be seen were jobs and renters.

 

Column/Department: 
Bio: 

Hans Nordby is managng director of PPR, A CoStar Company.

Other Features

Confident, Connected and Open to Change
REITs may appeal to the confidence, openness to change and independent streak of millennials. THOSE APPROXIMATELY 80 MILLION individuals born from...
Demographics Are Destiny
FOR COMMERCIAL REAL estate investors, demographics don’t matter over any short period of time; instead, changes in the economy and new space on the...
The Ground Game
I’ve been a REIT investor for decades (my California license plate reads REITDOG), but when reflecting upon REITs’ stock performance last year, I don...
To Buy or Not to Buy: That is the Question
In late August Taubman Centers (NYSE: TCO) announced a program to repurchase up to $200 million of its outstanding common stock. With REIT stocks...
A rising interest rate tide will not swamp commercial real estate’s boat
“I’m shocked, shocked to find that gambling is going on in here,” exclaims Captain Renault in the movie “Casablanca”, and we all laugh at the...
Convertible Preferreds: Something for Everyone
I’ve long been an advocate of REITs’ use of preferred stock as a financing tool and believe it’s attractive to both issuers and investors. A number...
If the Tap’s Running, Pour Me Another
In any analysis, leading indicators work well when there are a lot of them that are mostly moving in the same direction. Sure, you can get an outside...
Christmas Wishes in Spring
I’ve been making wish lists at Christmas since I was a small boy – at times with modest success. However, since I began buying REIT stocks in the...
Surprise Me
Although I won’t pretend that my track record of forecasting is better than anyone else’s, I enjoy playing the game. It is human nature to expect...
Mirror, Mirror, on the Wall
Who’s the fairest of them all? Unfortunately, the answer frequently depends on whether the judges prefer blue rather than red dresses this year...

Pages