Is there enough demand for all these new apartment buildings?

0

Demand for apartments has rebounded since the summer, although landlords have had to offer softer concessions to potential tenants to secure hot bodies in the large number of buildings nearing completion. The rate at which vacant apartments were absorbed fell by 40% in the first half of 2020, but made up most of this loss by the end of the year (from only 14% at the end of the year according to ALN) . Demand was strong in the third and fourth quarters, and the recovery still appears to be holding into 2021 so far. Unfortunately for building owners, the number of new market-priced units completed in 2020 reached nearly 345,000 according to RealPage, the highest number of deliveries since the mid-1980s, and another 404,000 are expected to be completed this year. The biggest increases in construction completions are coming in the coastal entry door markets which have already seen sharp moves.

There is a huge difference in the performance of apartments in the Sunbelt and in the hub cities. Absorption was strong in Dallas/Fort Worth, Atlanta, Houston, Phoenix, Denver and Charlotte, but New York and San Francisco lost large numbers of tenants.

The steepest rent declines have been in the luxury goods sector, as existing Class A properties must cut prices to retain tenants seeking or

more affordable housing options. Some tenants have been looking for the best move-in promotions, to get a few months’ rent free.

Operators of Class A buildings struggle to retain their tenants. New units tend to rent slowly in markets where many buildings have just opened for rent. As a result, new buildings offer significant rent reductions that take households out of stabilized Class A stock.

Retention rates were extremely high over the summer, but have since moderated considerably. This is especially true in New York and San Francisco. They have lost households to more affordable parts of the country and some of the remaining tenants are moving from property to property to take advantage of reduced prices for special move-in offers for new residents. For the country as a whole, retention of residents as leases expire was around 51% at the end of 2020 (data provided by RealPage). The number was much lower in Class A buildings, at 45%.

The worst performing metros have seen the retention rate of Class A tenants drop by 30-35%. And, there are people who have moved from their apartment in the city to a detached single-family rental in the suburbs, with more space for their home office and their dog.

But let’s keep in mind the long-term demand trend, which remains positive. Millennials are moving well into their next stage of life, moving out of loved ones’ homes, separating from roommates, and getting a place of their own. Some marry and found a family, others do not; either way, they can often find rental apartments best suit their lifestyle and pocketbook. They are largely responsible for the rebound in demand for apartments, and they will remain so for a long time to come. The same goes for baby boomers, some of whom still want to downsize.

That said, what is the outlook for Class A apartments in the medium term? I believe that “dealer-shopping” behavior is a short-term phenomenon and Class A buildings, especially those in the suburbs, will see a significant improvement in performance over the next 24-30 months. There will be continued weakness this year due to much new supply being completed, but longer term, in 2022 and 2023, I expect the apartment market to tighten again. In Sunbelt markets, particularly Florida, Texas, Arizona, Nevada, Georgia and the Carolinas, I expect rental market conditions to improve significantly in two years. And, to the extent that the projects that are being planned today can offer post-pandemic features that will support working from home, provide greater access to outdoor air (read: more balconies and taller) and better air filtration, they will gain a competitive advantage. advantage over pre-pandemic designs.

The competitive sourcing questions if you are planning a multifamily development are “what? “and when?” It will be important to examine the supply pipeline in your exact sub-market and ask your consultant to determine what they will include. The time component is important; it on the market at the same time as your project. You must know What is coming that will potentially compete with you, and whenand it’s always on a case-by-case basis.

Share.

Comments are closed.