Markets That Might Feel Multifamily Construction Glut the Most

Jay Parsons, the Chief Economist at RealPage recently analyzed the glut in  apartment construction. The reason is pretty clear. Multifamily has seen the largest wave of construction this year since 1970.

Multiple sources have told GlobeSt.com since early this year of their concerns that increased unit inventory could put significant downward pressure on rents as the newer buildings were trying to lease up and might well use a pricing strategy to do so because the landlords might not have other choices. Better to make less money than to lose it.

That helps explain why multifamily developers and investors need to understand where the biggest gluts, and their potential negative impact, might be. And where pricing power might be stronger in the face of less competition.

What RealPage did was to look back at previous peak building periods in metros and use them as indicators of a market’s ability to absorb inventory. The framework, which they admitted isn’t perfect, does help give some insight into whether a particular level of additional building seems more than the market can bear.

The firm then broke out the results into five groups: big supply; lots of supply, but not crazy; more than advertised; less than advertised; and minimum supply markets.

The first group, big supply, includes Austin, Raleigh, Salt Lake City, Nashville, Charlotte, Phoenix, Denver, and Jacksonville. “These are markets that historically have had little trouble absorbing big supply and will likely continue to see massive demand yet will likely get challenged in the short term,” Parsons wrote. “They’ll lease up, but slower than most developers want to see.” Big supply metros also include Huntsville, Colorado Springs, Sioux Falls, Port St. Lucie, Lakeland, Fort Myers, Provo, Boise, Asheville, Charleston, Savannah, Myrtle Beach and Pensacola. Long term, they’re fine. Short term, not really because renters will have choices and rents will fall.

The “lots of supply but not crazy” group includes Dallas/Fort Worth, Seattle, Atlanta, Tampa, Miami and Orlando. Reaching new high points of construction, they’re still adding more slowly than the big supply group because not every Sun Belt or Western city is building at an anxious pace.

“More than advertised” includes Philadelphia, San Jose, Washington, DC, Northern New Jersey (Newark), Long Island, Boston, Sacramento, San Diego, Los Angeles, Oakland and Minneapolis. They’re building a fair amount, and some high-supply submarkets will feel challenges.

“Less than advertised” metros like Houston, Chicago, Indianapolis, Columbus, Las Vegas, Kansas City, Portland, Riverside, Anaheim, and Greensboro, there isn’t a flood of new construction. There could be some oversupply but could do relatively well.

And then, the “Minimal Supply Markets” are those like New Orleans, San Francisco, and Cleveland where supply will remain tight.