The Apartment Markets at Greatest Risk for Oversupply

Multifamily construction in the US is at its highest level in 40 years. 

Currently, there are 824,000 units in development and 450,000 of them are expected to be delivered this year.

Apartments.com’s National Director of Multifamily Analytics, Jay Lybik, addressed the situation during a session at the National Apartment Association’s Apartmentalize conference in June in San Diego.

“While that might seem like a lot, it’s simply helping the apartment industry play catch-up – something needed to make up for underbuilding in 2011-2017,” Lybik said. “Therefore, there is no “over-building” today.”

But there are markets at risk for oversupply, he said.

Conditions Potentially Leading to Overbuilding

To determine which markets could be overbuilt, Apartments.com/CoStar looked at three circumstances and how they apply to what it classifies as four- or five-star rent growth markets (those predominantly comprising luxury properties).

• For supply there in 2022 compared to the three-year average, the top 10 are New York, Austin, Phoenix, Nashville, Tampa, Raleigh, Denver, Seattle, Minneapolis, and St. Louis.
• The 10 markets that saw the greatest climb in vacancy rates from Q4 2021 vs. Q2 2022 are Orange County, Tucson, Tampa, Raleigh, Phoenix, Las Vegas, Atlanta, Fort Lauderdale, Jacksonville and Norfolk.
• The 10 markets that have experienced the heaviest decline in rent growth are Palm Beach, Phoenix, Tucson, Tampa, Las Vegas, Jacksonville, Atlanta, San Francisco, Austin, and Sacramento.

Candidates for overbuilding can be considered to be those that fall in the top 10 in all three categories (Phoenix and Tampa) and a third (Austin) is in two of those and ranks No. 11 in vacancy rate spike. CoStar has labeled all three as being on “red alert.”

As for those others that sit in two of the categories (yellow alert) you find Raleigh and Las Vegas.

Where Potentially Troubling Scenarios are Found

Lybik reported that Austin saw record absorption beyond belief last year at 20,000 units compared to the new supply of about 12,000. This year, that script has flipped; 18,000 are forecast to be delivered, but only about 12,000 should be absorbed. “This will negatively affect the top-end of the market there,” he said.

Austin’s vacancy rates have moved from 6.3 percent in Q4 2021 to 7.1 as of Q2.

Phoenix had very balanced supply and demand the past few years, as lately, when supply hit a record number, demand was right there to meet delivered units.

This year, supply “is skyrocketing” to come in at just over 16,000 and demand forecast for just under the historical average of 8,000, he said. This has already created a situation where asking rent has been pushed down from 21.5 percent to 10.7 percent at the end of Q2.

Tampa had some of the highest rent growth last year. During the previous three years, demand there constantly outstripped new supply, “dramatically” lowering the vacancy rate and raising rental rates, Lybik said.

This year, demand is looking to come in at about 6,000 units while supply continues to rise to about 10,000 units. Vacancy has risen from 4.6 percent to 5.8 percent in the past six months.

In Raleigh, there was a very low number of apartment homes coming online while demand rose dramatically to the 5,000-unit range. This year, demand is tempering back to normal, coming in at approximately 4,000 and developers there are over-building with an expected 7,000 units on the way. “Demand might come in higher than we’re forecasting, but regardless, that will create a tough hurdle,” Lybik said.

In Vegas, demand was definitely outpacing supply over the past two years. This caused “some fantastic rent growth,” he said. This year, absorption has been “really weak” – 1,000 apartment homes by end of year — compared to 3,700 units coming on board.