Oversupply Risk Diminishes in Most Multifamily Markets

The risk of oversupply in the multifamily sector across the country may be subsiding as demand increases and the pace of construction slows. This could signal recovery in the market broadly, although the situation varies from market to market, according to a multifamily market analysis by Cushman & Wakefield.

More than a million units were under construction last year, the most ever in the United States. This wave of new construction while occupancy was retreating triggered the risk of oversupply in several markets. However, the multifamily market has experienced some of the strongest demand for apartments on record over the past year at a time when the pace of construction is now slowing.

Cushman & Wakefield noted the multifamily pipeline is shrinking in nearly all markets and noted significant declines in some of the hottest post-pandemic development epicenters, such as Austin and Nashville. Austin’s construction fell from nearly 19% of its inventory last year to 11% today, while Nashville’s fell from 15% to under 9%.

To determine where markets sit on the oversupply risk curve, the firm examined construction starts relative to demand using a formula of units of construction divided by average historical demand over a time period. Using this formula, the firm estimated that six markets had more than five years of supply coming to market as of last year, but this year there are no markets that have more than five years of construction left in their pipelines.

Both the Inland Empire and San Jose lead the nation in relative oversupply riskiness with a little more than 3.5 years of construction remaining, according to the report. This means demand will need to accelerate as these units deliver to prevent an overhang of new supply. However, San Jose and the Inland Empire diverge in the analysis as the Inland Empire’s vacancy is above its 2019 mark, while San Jose’s is below the 2019 mark.

Markets like Austin and San Antonio shift up the risk curve as vacancies have inched higher on heavy deliveries, according to the report. For these markets, the combination of elevated vacancies and deliveries adds an additional year to recover, assuming demand holds consistent, said Cushman & Wakefield.

Rounding out the top five markets in terms of oversupply risk were Miami, New York and Charlotte. Coming in at the lower end of the risk profile with fewer years to absorb supply were Minneapolis, Jacksonville, Louisville, Richmond and Orlando.

While some markets still have sizable construction pipelines, the uptick in demand suggests that the worst may be over for most markets, said Cushman & Wakefield. Assuming the economy avoids a recession while demand remains consistent, the degree of oversupply is expected to decrease quickly, leading to improvement in fundamentals and property values, even in a higher interest rate environment, the firm said.