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The Groundwork Is Already Laid for the Next Apartment Cycle

WASHINGTON, DC—Spreads are widening and lenders' appetite for construction finance loans is falling among banks, says CBRE director of research and analysis Revathi Greenwood.

By Erika Morphy | erikamorphy | | Updated on July 29, 2016
Revathi Greenwood Revathi Greenwood

WASHINGTON, DC—There is plenty of debate about when the current apartment cycle will end and why. One theory gaining currency is that rental rate increases are starting to slow, especially in markets where a lot of supply is coming online.

At the same time, though, as the industry discusses the various moving parts that could affect the timing of this cycle, there are signs that the groundwork has already been laid for the next cycle: namely, new regulations have made it more difficult to secure construction financing for projects.

 AvalonBay Communities CEO Timothy J. Naughton referred to this in the REIT’s recent earnings call (per a Seeking Alpha transcript):

Apartment deliveries are expected to peak nationally in 2016 and 2017 as permitting for new projects has slowed down over the last two quarters to three quarters from the cyclical highs in 2015. This is due in part to tightening credit from multifamily construction which has become much more pronounced over the last couple of quarters.

Naughton told listeners that the current cycle will continue its run though. “We still believe that fundamentals point mostly in favor of an extended cycle, much like we saw in the 1990s,” he said, citing  consumer confidence which is at a cyclical high and being led by young adults, an improved employment picture that is finally pressuring wages and early twenty-somethings that are moving into their household formation and renting years.

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