Lots of apartments you’ve been watching come out of the ground over the past year or two are about to hit the market. Properties scheduled to finish construction in the nation’s 100 largest apartment markets during the last half of 2014 total some 167,000 units, with targeted delivery timing split about evenly between the 3rd and 4th quarters.
Deliveries scheduled for the last half of 2014 top the tally from the first half of the year by roughly two-thirds. Furthermore, anticipated completions through the end of 2014 are virtually identical to the new supply total for all of calendar 2013.
Moving that much new product through initial lease-up all at once likely will prove challenging to some degree. However, there are reasons to be optimistic and to anticipate that we’ll do a better job on this task than we have during past product delivery spikes.
Most importantly, this new supply is coming on stream just as economic growth—and, in turn, support for new household formation—is accelerating from previous levels that were somewhat lackluster. Through July 2014, Bureau of Labor Statistics info shows that national job production has averaged 230,000 positions monthly during 2014, up 25% from an average of 184,000 jobs monthly in the 2011-2013 timespan. Hitting peaks in job production and apartment deliveries at the same time actually is highly unusual. What normally happens is that apartment starts accelerate as the economy gains overall momentum, with the completion of the biggest block of those units not coming until AFTER the job creation pace already has moved past its peak for the cycle.
Another reason to think that we’ll weather late 2014’s apartment completion jump reasonably well is that owners and operators of existing top-tier communities have been proactive in fine-tuning their positions in advance of this new supply.
Most pushed hard to maximize occupancy during Q2. Given accelerating economic gains produced the demand to make the process relatively painless, rent growth realized momentum at the same time. But don’t let Q2’s impressive rent increases mask the fact that there was an intentional effort to strengthen occupancy.
In another important move, many operators have juggled residency terms in the leases signed over the course of the past year in order to minimize expirations during 4th quarter, when leasing activity hits its seasonal low. While that move doesn’t help generate the demand that’s needed to build a resident base at a new property, it does lessen the overall impact of the new completions, since fewer existing renters will be exiting their current housing choices.
Make no mistake that MPF Research anticipates that performance momentum in the U.S. apartment market will take a hit due to the big block of completions coming in the last half of 2014. Compared to the mid-year stats, occupancy should backtrack a little, and the rent growth pace should slow mildly. But the hit should be less than what we’ve normally experienced when deliveries peak.
Furthermore, this has positive implications for 2015’s outlook. Unless we start approximately 80,000 units per quarter in the last half of 2014 (which is not going to happen because the numbers have been running at 40,000 to 50,000 units initiating construction per quarter for quite a while now), total ongoing building activity is about to come down quite a bit. Next year, we’ll have to digest fewer units to sustain occupancy and rent growth at the very healthy levels we’ve gotten used to of late.
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