ORLANDO – After years of booming construction, America’s apartment building binge is cooling.
Nationwide apartment starts dropped by about 8 percent in 2017, with more declines forecast in 2018 and 2019.
“The cycle for apartments is leveling off,” said Robert Dietz, chief economist with the National Association of Homebuilders. “Rental vacancy rates are rising and rent increases are slowing.
Nationwide, about 360,000 multi-family housing starts were recorded – the lowest total in three years.
“In 2017 we under anticipated the decline in multifamily,” Dietz said at the industry’s annual conference in Florida. “For 2018 we think that decline will continue but at a lower rate.”
Dallas-Fort Worth has already seen a dip in the number of apartments in the development pipeline.
At the end of the year about 30,000 apartments were being built in North Texas. That’s down from more than 38,000 in third quarter 2016, according to Richardson-based RealPage.
Even with the decline, D-FW is still the country’s second busiest apartment building market behind only New York.
“RealPage is anticipating that apartment starts will slow somewhere between 10 and 20 percent in 2018,” said chief economist Greg Willett. “The cooling won’t be even across metros.
“There are a half dozen spots where we’re concerned that starts could prove a little too aggressive simply because demand has been so strong over the past few years,” he said. “Dallas tops that list, while other locations we’ll be monitoring closely are Seattle, Denver, Charlotte, Nashville and Boston.”
A flood of new apartments coming on the market in North Texas is already impacting developers and landlords.
Apartment rent increases in North Texas in declined from as much as 6 percent in recent years to only 2.9 percent in 2017.
The U.S. apartment development industry has enjoyed years of strong building increases following the recession. So it isn’t surprising that things would start to down shift.
“The recovery has been both stronger and faster, especially compared to trends in the single-family homebuilding side,” said Michael Neal, senior economist for the homebuilders’ association. “We are seeing a move back to something closer to normal.
“We expect to be roughly around 350,000 multifamily starts in 2018 and fall slightly to 344,000 in 2019,” Neal said.
The slowdown in building comes as apartment market conditions are starting to soften.
“We have seen a general increase in rental vacancy rates since the beginning of 2016,” Neal said. “There has been a slight slowdown in rent grow over the last few months, but it does remain at historic price levels.”
Neal said there is also a broad shift in America from rental to more home ownership.
“We have begun to see a slowdown in growth in renter occupied households and an outright decline in the last two quarters,” he said.
More renters desire to buy a house than at any time since the recession, but Neal said a lack of moderate-priced homes on the market will hold them back.
“We have an elevated potential of demand but at the same time we have a low inventory,” he said. “We are estimating there are approx. 21 renter households for every available home.
“We expect this shift from renter to homeownership to be a slow grind because the are just not enough homes available to meet this level of anticipated demand.”
While markets like North Texas are trying to digest thousands of new apartment units, nationwide there’s still a shortage of rental housing, according to estimates by an industry trade group.
Caitlin Walter, senior director of research with the National Multifamily Housing Council, estimates that another 4.6 million apartments are needed nationwide through 2030 to keep up with demand.
“That works out to 328,000 units a year,” Walter said. “This demand is spread throughout the country.
“We have a lot of pent up demand we still have work through.”
D-FW will need more than 266,000 additional apartments during the next 12 years, Walter said. Only New York City with a projected demand for 279,000 apartments will need more building.
Walter said it’s tougher for apartment builders to produce new projects than in recent years.
“On the whole there is financing available, you just have to have a good deal,” she said. “The bulk of new apartment construction is actually occurring in just a few metros.
“There are some concerns some of these metros with at ton of deliveries are getting overbuilt.”
Apartment builders say that rising land prices and higher building costs are limiting construction.
“Rents are going up but not as quickly – we are getting squeezed,” said Virginia builder Steve Lawson, who heads the National Association of Home Builders multifamily council. “Increasing construction costs and interest rates hurt the ability of builders to bring product to market.”