Why Multifamily Growth Will be ‘Tested’ Soon

Expect flat to falling rental growth in some U.S. multifamily markets as new supply hits asking and effective rental rates, says RealPage’s Keith Dunkin.

Multifamily rental growth will be tested “much further” in 2016 as the industry sees the highest level of new supply hit the U.S. market since the 1980s. More than 317,000 units are expected to be built this year, a 40 percent increase from the number of new apartments delivered in 2015 and up from the 252,000 units completed in 2014. For RealPage’s president of asset optimization and business intelligence, Keith Dunkin, that’s a sure sign some markets will see “flat-to-falling rents” as rising inventory levels start to impact asking and effective rental rates. “Much of this new supply continues to be high-priced, Class A units in urban submarkets and there’s no question that there remains significant pent-up demand for apartments more broadly [across the U.S.],” Dunkin says. “But some markets are already seeing very competitive leasing environments with flat-to-falling rents in urban Class A product—and that list will likely grow.” RealPage, through its research portfolio company MPF Research, has already highlighted five markets to watch for new supply, including: 

• San Francisco, where 7,320 new apartments are set for completion in 2016, up 358 percent on 2015’s 1,598 completed units 
• Greenville, South Carolina, where 2,440 units are planned for 2016, up 322 percent from 2015’s 578 completed apartments 
  
• Los Angeles, where 13,237 apartments are planned in 2016, up 156 percent from 2015’s 5,177 finished units 
• Miami, where 6,313 units are scheduled for completion in 2016, up 149 percent from 2015’s 2,531 finished apartments
• Nashville, where 8,121 new apartments are planned for 2016, up 103 percent from 2015’s 4,002 completed units.  

“The depth of pent-up demand for multifamily will be tested much further in 2016 [by new supply],” says Dunkin.

Houston: A Case Study

Indeed, in Houston—which has seen more than 20,000 units delivered across the metro in the 12 months leading up to to September 2015, according to commercial real estate services firm Transwestern—new supply and the loss of higher paying energy jobs are already hitting multifamily revenues. Lease applications fell 3.5 percent in November 2015 and January 2016, compared to the year prior, says Dunkin, citing rent roll data sourced from Houston multifamily assets using RealPage software, with leases down 4.9 percent over the same period. With renter incomes reportedly down 4.2 percent on 2014 levels, that has triggered a drop in multifamily occupancy levels of 0.7 percent and resulted in total lease revenue in Houston falling 0.6 percent since August 2015, says Dunkin.