NEW YORK CITY–The peak of the multifamily market may be here, according to Fitch Rating's quarterly update of the asset class.
We have heard this before, of course. One reason to pay particular attention now though, is that the rating agency is basing its projection on developments from Q1 figures as they compare year over year.
It is also wary about the amount of new construction entering the pipeline this year, Director Tamon Hayes tells GlobeSt.com. “We are definitely worrying about overbuilding in certain markets,” he says.
Fitch does note that there was a slight pullback in inventory growth for the quarter with only 39,000 units delivered, compared to the over 47,000 units that came online in Q1 2016. However, according to Reis' calculations the vacancy ended the quarter at 4.3%, which is 10 basis points up from Q4 2016 despite the new deliveries.
An Inflection Point
Basically, year-end 2016 was an inflection point for the market, Managing Director Eric Rothfeld tells GlobeSt.com. “We are going to see some flattening out and declines in certain markets.”
Many of these markets no doubt will respond with increased concessions thus maintaining the stats for asking rents. “But the net effective rents will start to decline,” Rothfeld says.
A case in point is New York City, where concessions have become an expectation among renters.
New York effective rents fell 0.7% during Q1 2017, the largest quarterly decline since 2010, Reis figures show. Overall, effective rents have fallen for three consecutive quarters; year-over-year effective rents fell 0.6% from Q1 2016 to Q1 2017.
Concession-heavy Markets
Indeed concessions appear to be Fitch's line in the sand. Critics may argue that markets often surpass previous peaks and that is a realistic line of debate, Rothfeld says. “But there has been quite a bit of both new construction and heavy concessions in some markets.” That does not bode well.
Rothfeld says the weak link for this market cycle is the Class A product, rather than Class B. “There is a lot of new construction on the Class A side and developers must achieve a certain return on the cost of this construction.”
A good bit of that construction, as Hayes noted, will be delivering this year particularly in the South Atlantic, which is expected to see the most, or 31%, of completions this year, according to Reis data. That is followed by the West (at 22%), and southwest regions (21%) while completions in the northeast and Midwest regions are expected to encompass 15% and 11%, respectively.
Vacancies will rise until this supply is absorbed. Fortunately, starting in 2019 the amount of new supply is forecasted to slow down and decrease to 75,096 units in 2021.
We have heard this before, of course. One reason to pay particular attention now though, is that the rating agency is basing its projection on developments from Q1 figures as they compare year over year.
It is also wary about the amount of new construction entering the pipeline this year, Director Tamon Hayes tells GlobeSt.com. “We are definitely worrying about overbuilding in certain markets,” he says.
Fitch does note that there was a slight pullback in inventory growth for the quarter with only 39,000 units delivered, compared to the over 47,000 units that came online in Q1 2016. However, according to Reis' calculations the vacancy ended the quarter at 4.3%, which is 10 basis points up from Q4 2016 despite the new deliveries.
An Inflection Point
Basically, year-end 2016 was an inflection point for the market, Managing Director Eric Rothfeld tells GlobeSt.com. “We are going to see some flattening out and declines in certain markets.”
Many of these markets no doubt will respond with increased concessions thus maintaining the stats for asking rents. “But the net effective rents will start to decline,” Rothfeld says.
A case in point is
Concession-heavy Markets
Indeed concessions appear to be Fitch's line in the sand. Critics may argue that markets often surpass previous peaks and that is a realistic line of debate, Rothfeld says. “But there has been quite a bit of both new construction and heavy concessions in some markets.” That does not bode well.
Rothfeld says the weak link for this market cycle is the Class A product, rather than Class B. “There is a lot of new construction on the Class A side and developers must achieve a certain return on the cost of this construction.”
A good bit of that construction, as Hayes noted, will be delivering this year particularly in the South Atlantic, which is expected to see the most, or 31%, of completions this year, according to Reis data. That is followed by the West (at 22%), and southwest regions (21%) while completions in the northeast and Midwest regions are expected to encompass 15% and 11%, respectively.
Vacancies will rise until this supply is absorbed. Fortunately, starting in 2019 the amount of new supply is forecasted to slow down and decrease to 75,096 units in 2021.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
