By Meghan Hall
Industry professionals are well aware of the apartment boom that has helped to define the nation’s commercial real estate market over the course of the last decade. With close to 2.34 million deliveries between 2010 and 2019, the bulk of these deliveries have occurred since 2015, as developers have picked up the speed of construction, increasing output in some of the nation’s largest markets such as the San Francisco Bay Area and Seattle. However, that prolific growth could be slowing down, according to a new report released by RENTCafe, a commercial real estate analytics site. RENTCafe’s report, released in September, indicates that national apartment construction has declined for the second year in a row, marking the potential beginnings of a new trend in apartment construction.
“The pace of multifamily construction nationwide is bound to impact rent growth as well as the health of the rental market,” explained Florentina Sarac, a research analyst and real estate writer for RENTCafe, who authored the study. “In fact, the health of the market is in part determined by the speed with which the city is able to bring more units on the market whenever there’s growing demand. If it can’t build enough units for its renter population, prices will eventually go up. It’s important the pace with which both developers and local city planning can respond to a spike in demand for apartments.”
The study sites Yardi Matrix data, which estimates that an estimated 299,422 new units will be delivered this year. This is a significant drop compared to last RENTCafe states, as the number of units completed in 2018 was 326,240, an 8.2 percent decrease. 2017’s numbers were even higher, with a total of 331,756 new units, and a new peak for the cycle. However, RENTCafe also notes that deliveries over the last decade are still significantly less than peak levels reached in the 1970s and 1980s, where the number of deliveries for each decade reached close to 3 million and 2.64 million, respectively. Between 1990 and 1999, when apartment construction was slower, apartment deliveries only amounted to 1.6 million.
The importance of tracking national apartment deliveries, stated Sarac, is to evaluate rent projections and supply and demand imbalances. Between 2009 and 2011, for example, apartment construction decreased from 228,000 to 110,300 deliveries, rent growth increased rapidly from -3.7 to 2.9 percent.
“Apartment construction is one of the main factors influencing rent growth and the ways it fluctuates over the years,” said Sarac. “Whenever there’s a balance between supply and demand, rent prices are kept in check.”
The large number of deliveries nationwide in recent years is just one of the reasons for the current slowdown as rent increases have also moderated. RENTCafe also sites rapidly rising construction costs and labor shortages as two other challenges facing developers who must carefully watch their construction schedules and bottom lines.
“Increasingly high construction costs, a shortage of skilled labor, and the possibility of a recession are just some of the factors influencing this slowdown in apartment construction. Depending on the market, there can be several other factors, such as zoning and high housing costs for construction workers,” added Sarac.
But while deliveries are slowing down nationwide, some major metros are bucking the trend with a projected increase in deliveries; cities such as San Francisco, San Jose and Seattle are still top-ranked for new deliveries. In the San Francisco Bay Area, San Jose is expected to deliver the most units in the region, with 2,290 units in the pipeline. Oakland and Milpitas are not far behind, with 1,850 and 1,685 units, respectively, coming online by the end of the year. Milpitas, Mountain View and Sunnyvale combined also saw their deliveries increase by 283 percent, from 1,579 units in 2018 to 6,044. 1,204 units are also anticipated for San Francisco.
However, the Seattle metro area is expected to surpass the Bay Area, following behind Dallas-Fort Worth for most units delivered in 2019. Both the San Francisco and San Jose metros, historically two of the strongest submarkets, are expected to deliver less than half the units coming to Seattle this year. According to RENTCafe, the Seattle area will deliver a projected 13,682 units this year. Seattle proper accounts for approximately 6,854 of those units.
“Seattle is the best example as having paid attention to demand, construction has been steady here in the last couple of years, and the metro is planning to deliver about 14,000 new units this year,” said Sarac. “On the other hand, construction in the Bay Area has only started picking up speed recently, after two years of slowdown. So, even though the new units are more than welcome, they’re still not enough to meet the demand and will, inevitably, impact rent growth.”
