The recent surge in apartment construction nationwide has given rise to concerns of building too much new product too quickly. In essence, the concerns are centered around how quickly the new product in each market can be absorbed. This recent four-part series aimed to explore that question by examining the supply and demand relationship in various ways and across specific metro areas. In the first part, construction volumes in certain metros were compared to recent demand trends in those metros. The second part explored the extent to which demand drives supply. And the third part examined which metros might be susceptible to supply overhang. The fourth and final piece in our supply series builds upon that the proportionate view of supply and demand.
As a quick reminder, in the third part of this series, we viewed supply as the number of units under construction as a percentage of total existing units and annual absorption as a percentage of existing units using an average of the previous three years of absorption. This approach allows for a level playing field to analyze characteristics by metro. With four distinct quadrants, we get a sense for market characteristics:
- High Supply/Low Absorption
- Low Supply/High Absorption
- Low Supply/Low Absorption
- High Supply/High Absorption
It’s important to note that we’re measuring historical absorption, which can be (and has been in this cycle) limited by product availability. That’s why San Francisco and New York show up as “low absorption” markets. Obviously, there’s pent-up demand for apartments in undersupplied markets like that.
Our goal for this series was simple: To view supply and absorption in interesting ways and identify where the sweet spot between the two actually lies. However, in order to form a solid conclusion, it requires many different data points and perspectives. But our research laid out in this four-part series suggests that Charlotte, Raleigh/Durham, Nashville, Austin and Washington, DC are expected to face short-term headwinds due to the massive amounts of oncoming supply – although strong demand tailwinds should prevent any long-term hangover. On the other hand, late-cycle recovery stories like Atlanta, Los Angeles, Orlando and Las Vegas have upside potential – at least in the short term, until structural drivers take over. Finally, strong employment metros like Houston, Dallas, Seattle and Denver are well positioned to absorb the large amounts of new supply set to complete in 2014 and 2015 and should continue to perform well.
Keywords: MPF Research, supply and demand, supply overhang, supply and absorption
Did you miss any part of this four-part series? Check out part one, part two, and part three.