BOCA RATON, FL—Too many apartments, not enough renters? Will an oversupply of development saturate newly recovering markets? How much is too much? Those are the questions that still hit home for multifamily investors in 2014. But are the worries legitimate? For some markets, perhaps. But Jones Lang LaSalle predicts 14 cities will overcome oversupply issues, with Sunbelt markets such as Tampa, Jacksonville and Phoenix shining brightly in the year ahead.
The markets JLL expects to shine into 2017 include: Phoenix, Atlanta, Jacksonville, Tampa, San Diego, Dallas-Fort Worth, San Antonio, Houston, Philadelphia, Orange County, the Inland Empire, Palm Beach, Las Vegas and Memphis.
“Besides construction levels, it's all about job growth and household growth—those are the two critical demand factors that will determine how metros will perform through the current development cycle,” said Jubeen Vaghefi, international director and leader of the firm's Multifamily Capital Markets group. “The surprising news to many will be the resurgence of the sunbelt markets over the tech-heavy regions. After some very tough years, that's where we're seeing a significant rise in new households as a result of improving economic conditions.”
According to JLL's Multifamily Outlook report, released last week at the National Multi Housing Council's Annual Meeting here, the national apartment sector expansion continued in 2013 as occupancy reached a 10-year high of 95.8% and gains averaged 13 basis points a quarter. In addition, as expected, 2013 turned out to be a record-breaking year for multifamily sales as volumes totaled more than $100 billion—outpacing 2012's velocity by nearly 30% and surpassing the 2007 record by nearly $6 billion. New York, the greater Washington, DC area and Los Angeles led in sales volumes with a combined total of more than $30 billion. Dallas and Houston rounded out the top five, followed by San Francisco, Atlanta and Phoenix.
“A large component of these record volumes was needle-moving portfolio sales, ownership entity transfers and mergers of major apartment operators,” explained Brady Titcomb, vice president and director of US Multifamily Research at JLL. “In addition, the US recovery over the past 12 months, rising consumer confidence and still historically low interest rates played a critical role in aiding growth by propelling the housing market recovery.”
The JLL report showed that the housing recovery is causing expansion nationwide. In addition, tightening market conditions brought US quarterly rent increases for 2013, averaging 75 basis points a quarter with high-tech and STEM employment centric markets driving the most notable rent growth.
On a year-over-year basis, the JLL report showed that Seattle, Nashville, San Francisco, Denver and Houston have led in annual rental growth averaging between 4.5% and 7%.
The report also showed that since 2012, uncertainty overseas has driven demand for US multifamily product back to pre-recessionary levels. While international capital has found its way to nearly all of the major metros, Dallas, New York, Chicago, Houston and South Florida each saw more than $300 million in cross-border capital since the start of 2012.
According to the NMHC's quarterly survey of apartment market conditions released in October, following four years of almost continuous growth, apartment markets have begun to slow. NMHC's vice president of research and chief economist, Mark Obrinsky, says, "Conditions cannot continue to improve indefinitely and new development is at least somewhat constrained by available capital, though more on the equity than the debt side.”
But overall, the strength of the fundamentals will continue to propel the sector, according to Vaghefi, “We expect multifamily performance to remain strong for the foreseeable future. While there are some supply concerns that will slow the pace of occupancy and rent growth, overall the anticipated increase in job growth and household formation will help to mitigate the threat of oversupply and keep conditions balanced across the country.”
With continued improving economic conditions nationally, JLL anticipates US occupancy gains to average 40-60 basis points annually over the next three years. Assets located in secondary markets and value-add opportunities will be in higher demand as the search for yield becomes increasingly difficult.
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Sule Aygoren
Aygoren oversees the editorial direction and content for ALM’s Real Estate Media Group, including Real Estate Forum and GlobeSt.com. In her tenure with ALM, she’s held roles of increasing responsibility, including Managing Editor. Aygoren has received several awards for her coverage including Best Trade Magazine Report from the National Association of Real Estate Editors and the James D. Carper Award for Young Journalists. Under her direction, Forum has received four national NAREE awards for Best Commercial Real Estate Trade Magazine.
