January 13, 2017

Multi-Family New Construction Pipeline Running at Highest Level Since 1974

Our monthly survey of apartment owners and managers canvasses 1.6 million apartment units, nearly four times the size of the public apartment REITs. Our survey is nationally representative, covering both urban and suburban locations and various price points.

In December, our contacts reported blended rent growth of 3.1%, matching 2013 as the softest increase over the last seven years. As has been the case in recent months, while overall rent growth remains relatively healthy, incremental pressure from new supply has disproportionately impacted higher price points in urban locations. For example, for the 17th consecutive month, our contacts rated the class B price point better than class A relative to expectations.

As a sign of further pressure lying ahead, there was almost a 100 basis point spread between rent growth on renewal leases at 3.6% and leases for new tenants at 2.7%. This marks the widest spread between renewal and new leases since our survey data began in late 2010. The pressure on new leases reflects elevated new construction supply that is in the early stages of being delivered, causing landlords to discount product more extensively.

To put perspective around the pipeline of new supply, according to the Census Bureau, there were more than 600,000 multi-family units under construction each of the last five months. This is the first time that the market has crossed the 600,000 barrier since 1974, with the pending supply far in excess of the averages for the 1980s (415,000), 1990s (230,000) and 2000s (375,000). Although some believe that the downward trend in multi-family rent growth is nearing a trough, it is hard for us to side with that argument after considering the magnitude of pending new supply.


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