Brokers Agree: Tracking the Effect of Multifamily Starts Is Tricky

There has been general research in the multifamily sector suggesting that additional units will turn into inventory that will negative affect future rent increases and vacancies. But average results and projections from them fall short because nothing in the country is that evenly distributed, as a virtual U.S. meeting by NAI Global, hosted by Arthur Milston, senior managing director and co-head of the Capital Markets Group, shows.

First, there are many metros still seeing continued employment growth and rental rate increases, with participants mentioning Austin, Charlotte, Tampa, Orlando, Phoenix, Nashville, Raleigh, Dallas, and Houston. All unsurprisingly in the Sun Belt because that’s where demographics have shifted. And, pointing to a GlobeSt.com story, they noted that RealPage data showed apartment construction driving inventory growth in 15 of the country’s top 50 metro markets.

One example was Dallas/Ft. Worth which sees a pipeline of more than 74,000 apartment units, an all-time high for new construction.

“New multifamily construction permits are also on the rise in those communities and the rhetorical question was asked – how long can there be rent growth with so much inventory coming to market/?” they said. However, there is other confusing data, like that from the Census Bureau that said multifamily starts in May were up 41% from April. RealPage Chief Economist Jay Parsons has his doubts for a number of reasons, including forces creating downward pressure on construction — like banks pulling back on construction loans and financing issues causing the acceleration of construction delays — as well as questions about the Census methodology.

Participants in the discussion were unanimous that lenders were “conservatively underwriting loans on new apartment communities – at or around 3% (rent growth).”

Someone from Huntsville, AL mentioned that Madison, a nearby city, had stopped issuing new multifamily permits as there are 6,000 under construction and another 8,000 that are pending approval.

Another participant who had attended a CRE Finance Council (CREFC) panel brought up a split between Class A and Class B buildings. The former saw cap rates hit bottom a year ago at 3.9%, moving back to about 5.2% since, a 125-basis point increase. Class B properties cap rates only increased 75 basis points. Multifamily vacancy rates are back to a pre-pandemic 6.7% level, though again that is a national number and will vary significantly between markets. A Las Angeles participant said cap rates are still in the mid-4% range in some submarkets there but higher in others, like 5.5% in Hollywood.

A related point raised was that the prospects of converting office space to apartments are largely overblown. Only a tiny percentage of conversion will happen because of cost (in New York City, between $600 and $800 a square foot) and a 20% to 25% loss of rentable square footage.