In the past year, the multifamily housing sector has experienced a historic surge in apartment completions. According to the U.S. Census Bureau and the Department of Housing and Urban Development, annualized multifamily completions have reached 740,000 units, a figure not seen since 1974. This 36.5% increase from July’s seasonally adjusted total and a staggering 79.2% rise from August of the previous year marks a notable shift in the housing landscape.
For investors, this surge presents both opportunities and challenges. Understanding the factors behind the wave of completions and its implications is essential to navigating the evolving real estate market.
A Perfect Storm of Contributing Factors
Several factors have converged to drive the spike in multifamily completions, creating what could be described as a perfect storm.
1. Pandemic-Era Delays Now Catching Up
One of the primary reasons for the surge in apartment completions is the catch-up effect from pandemic-induced delays. During the height of COVID-19, multifamily construction faced significant slowdowns due to labor shortages, supply chain disruptions, and strict health regulations. As those barriers have eased, many projects that were delayed for months (or even years) are finally reaching completion.
2. Pent-Up Demand for Housing
As cities and economies reopened post-pandemic, demand for housing skyrocketed, particularly in urban areas. With remote work providing flexibility, many individuals moved from expensive housing markets to more affordable areas, driving demand for multifamily housing in regions like the Southeast and Midwest. Developers and investors responded to this demand by fast-tracking projects, adding significantly to the inventory.
3. Easing of Financing Challenges
While financing has been a challenge in recent years due to rising interest rates and inflation, the multifamily sector has benefitted from relatively more stable financing options compared to other real estate sectors. Mortgage-backed securities (MBS) backed by Fannie Mae and Freddie Mac, which offer stable financing options for multifamily properties, have played a key role in this sector's growth. This has allowed developers to move forward with projects despite the volatility in other real estate markets, such as office and retail.
4. Increased Permitting and Zoning Flexibility
Many local governments have implemented policies to incentivize multifamily development to address housing shortages. Cities experiencing high population growth, such as Austin and Phoenix, have streamlined their permitting processes and adjusted zoning laws to allow for greater multifamily development. This has accelerated the construction and completion of multifamily units.
For example, in August 2023, New York led the nation in multifamily permitting, issuing 30,129 permits—a 23% increase from the previous year. Other markets, such as Austin and Phoenix, have also seen significant activity, though they’ve started to show signs of cooling.
Implications for Investors: Opportunities and Risks
The wave of apartment completions presents a mixed bag for investors. While new inventory can meet the demand for housing, it also introduces potential oversupply concerns, impacting rent growth, vacancy rates, and ultimately, investment returns.
Potential for Increased Competition and Pressure on Rent Growth
There is growing concern about oversupply in markets experiencing rapid completions, such as Dallas, Phoenix, and Houston. When a large number of units hit the market simultaneously, landlords may need to compete aggressively to fill vacancies, leading to pressure on rent growth. This could create a renter’s market, where tenants have more negotiating power, and property owners must offer concessions, such as rent discounts or amenities, to attract tenants.
In cities like Los Angeles, where multifamily completions are significant, landlords could see a cooling in rent appreciation, especially as demand fails to keep pace with supply. According to the U.S. Census Bureau’s report, permitting in Los Angeles has dropped by 5,800 units from the previous year, but completions remain high.
Opportunities in High-Growth Markets
Despite the risk of oversupply, opportunities abound in high-growth markets. The South and Midwest regions have shown resilience, with population growth driving sustained demand for multifamily housing. Cities like Atlanta, Tampa, and Raleigh have seen consistent demand, even as new units flood the market. Investors focusing on these regions can benefit from robust rental demand, driven by factors such as migration from more expensive coastal cities and increased job opportunities.
Moreover, these regions often have lower construction costs compared to major coastal markets, which can lead to higher profit margins for developers and investors. Atlanta, for example, saw a 9.7% increase in multifamily permitting, positioning itself as a strong contender for sustained growth.
A Window for Value-Add Investments
In markets where oversupply is a concern, investors may find opportunities in value-added multifamily investments. These are properties that may not be newly built but offer the potential for renovation or repositioning to attract higher rents. With so many new units coming online, older properties may face competition, allowing savvy investors to purchase them at a discount, renovate them, and increase their value.
In addition, the tightening in the financing environment for new projects could mean fewer developments start in the coming years, leaving room for well-positioned value-added properties to capture demand once the current wave of completions levels off.
Long-Term Stability in Workforce Housing
Another segment likely to remain stable despite the current surge in completions is workforce housing—affordable multifamily units targeted at middle-income tenants. While luxury apartment buildings in urban cores might see slower lease-ups, the demand for three-star, mid-priced apartments remains strong.
As housing affordability becomes an increasing concern, particularly in cities like New York and Los Angeles, there is a growing need for affordable rental options. Investors focusing on workforce housing, particularly in secondary and tertiary markets, are well-positioned to benefit from sustained demand.
What the Future Holds: A More Balanced Market?
The current surge in multifamily completions signals a shift toward a more balanced market. Construction backlogs and permitting delays that have kept multifamily development elevated may now be tapering off. The peak for both permitting and starts appears to be in the rearview, and as fewer projects begin, the market could eventually see a reduction in new supply.
For investors, this means paying close attention to the dynamics of each market. While some cities may struggle with oversupply, others will continue to see robust demand for multifamily units. Timing is key—those looking to enter the market now may benefit from lower prices on existing properties as developers and owners adjust to the new market realities.
As the U.S. housing market continues to evolve, investors will need to stay informed about local market conditions, trends in population growth, and economic indicators like employment and wage growth. This knowledge will be critical in making strategic investments that can withstand both short-term fluctuations and long-term shifts in the multifamily landscape.
In conclusion, while the historic surge in apartment completions may pose some risks, particularly in oversupplied markets, it also presents unique opportunities for savvy investors. Investors can confidently navigate this new phase in the multifamily market by focusing on value-add opportunities, workforce housing, and high-growth regions.
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