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Small Metro Leaders for Apartment Building

Small Metro Leaders for Apartment Building

While U.S. apartment construction by and large remains focused on the big metros where deliveries have been substantial during the past decade, near-term inventory growth will be meaningful in a few tertiary markets.

There’s a clear need for additional stock in some of these small markets, most notably in Huntsville, AL, Reno, NV and Boise, ID. In other cases, short-term opportunities are less clear cut.

Big-Picture Stats

About two-thirds of the nation’s apartment additions over the past decade or so have come on stream in 20 metros that continue to lead construction activity year after year. The group of markets consists of fast-growing Sun Belt cities plus gateway metros in the Northeast and along the West Coast.

That concentration of building makes sense. The biggest Sun Belt areas generally are adding the most jobs and households, while the coastal gateway areas tend to have chronic housing shortages.

Today’s ongoing apartment construction across the U.S. totals 611,202 units, with 27% of it occurring in the gateway metros and 57% in other large markets with at least 100,000 existing apartment units.

But what about the 97,630 units under construction in the smallest markets? Are there key concentrations of building, and is the development activity needed?

Huntsville Leads the Way

The most aggressive apartment building activity occurring in the nation’s small markets is taking place in Huntsville, AL, where additions totaling 3,256 units will grow the stock by 10.3%.

There’s definitely a need for more product here, as indicated by March 2021 occupancy that stands at 97.3% and annual growth in effective asking rents that reaches 6.4%. Furthermore, with the aerospace sector playing a huge role in the local economy, Huntsville has job base and household characteristics that instill investment confidence that doesn’t necessarily exist in most small markets.

Two more active building centers where product additions clearly are needed are Reno, NV and Boise, ID.

Reno’s 7.7% inventory growth (3,536 units) comes at a time when apartment occupancy is at 96.6% and annual rent growth is at 7.6%. The case for further development need is perhaps even stronger in Boise, where 7.6% inventory growth (2,048 units) is justified by current occupancy of 97.9% and an annual rent increase pace at a stunning rate of 12%.

Product on the way also seems likely to do well in a couple of Florida’s tertiary markets – Lakeland and Palm Bay.

Look for inventory growth of 6.9% in Lakeland, where 1,826 apartments are under construction. The market’s current occupancy figure is 96.7%, while annual rent growth is at 3.6%. In Palm Bay, the near-term inventory growth rate reaches 6% (2,199 units). The existing stock posts 96% occupancy and a typical 4.6% year-over-year rent increase.

Hold Off on More Starts in Some Areas?

Some other tertiary markets with significant blocks of apartment product on the way register current performance fundamentals that are OK, but perhaps not strong enough to suggest that more properties should be started right away.

In Fayetteville, AR, ongoing construction of 2,765 units will grow the stock of market-rate apartment product by 7.4%. Since this is a college town, it’s also significant that 1,334 beds for University of Arkansas students are on the way at off-campus student housing properties. Today’s occupancy rate for conventional properties is solid at 96.2%, but essentially flat rents – annual growth of just 0.4% – are not ideal.

A couple of the tertiary metros examined for this analysis have more than 4,000 apartments under construction. The figures are 4,120 units, or 7.2% inventory growth, in Bridgeport, CT and 4,061 units, or 6.3% inventory growth, in Charleston, SC.

Bridgeport’s apartment performance outlook remains reasonably solid, especially if you assume that employees of many metro New York-based firms continue to have the option to work from home in the near term. Current annual rent growth in Bridgeport is on the sluggish side at 1.7%, but occupancy is fine at 95.8%.

In Charleston, current occupancy stands at 94.4%, the lowest rate among the markets highlighted here. Annual growth in effective asking rents registers at 2.1%. While that’s not a home run performance, it’s actually pretty typical for the country’s tertiary market where construction activity has been significant and non-stop throughout the past decade or so.

Cape Coral is another Florida market that will add sizable new supply to its apartment base in the near term. With 3,280 units under construction, 6.7% inventory expansion lies ahead. Today’s occupancy rate in this metro is fine at 95.9%, but there’s no pricing power as effective asking rents are off 0.2% year-over-year.

Then There’s Midland/Odessa

Ouch! In an extreme example of bad timing, 1,612 units under construction in the Midland/Odessa area will grow the West Texas Oil Patch apartment inventory by 6.4% in the near term. This market is by far the worst performer across the country’s 150 largest metros. Today’s occupancy rate is just 86.6%, and effective asking rents are down 29.9% from the year-ago level.