Commercial Investment Real Estate November/December 2018 | Page 27

OCCUPIED
FOR RENT
The
multifamily housing
sector is defying gravity. Property fundamentals
and investor appetite are holding steady under a
heavy load of new deliveries.
The multifamily market already is several years
into its bull run, generating strong property perfor-
mance and a surge in supply. Yet renters continue
to absorb much of the new inventory coming onto
market, with national vacancies rising only 10 basis
points in the second quarter of 2018 to a 4.7 percent
average, according to Yardi Matrix.
“We see the U.S. multifamily market as being
dynamic, especially over the past year,” says Doug
Ressler, director of business intelligence at Yardi
Matrix in Santa Barbara, Calif. Approximately
875,000 new units were completed between 2014
and 2017, with another 140,000 units in the first
half of 2018. Most construction occurred in the top
30 metro areas, with a high concentration of class A
luxury apartments being built.
Some markets are showing softening in the high-
end segment of the market, especially in the Mid-
west. Yardi Matrix is predicting that overall perfor-
mance is going to be fairly consistent and positive
in most cities, Ressler notes. In fact, high-growth
metros such as Dallas; Charlotte, N.C.; Nashville,
Tenn.; and Denver all saw an improvement in their
occupancy rates during the first half of 2018, with
vacancies in all four markets hovering at around 5
percent. “With deliveries in their third year of cycle
peaks, the increase in occupancy rates demonstrates
the resilience of apartment demand,” he says.
The big question is how metrics will hold up,
especially with a significant number of projects still
underway or planned. “Development remains strong
in all sectors and all submarkets here in Denver,” says
Rick Egitto, CCIM, principal of capital markets
in Avison Young’s Denver office. “Vacancies have
ticked up a bit to just over 5 percent, but given the
large amount of product delivered, this is not sig-
nificant,” he says.
Yet the players have changed in terms of who is
actively building. Some early groups constructing
apartments in Denver in 2010 to 2013 have slowed
their activity, while other national firms have
stepped in to pick up the slack, Egitto says. Devel-
opers also are less active in the core of the city and
now are taking a bigger step into suburban markets,
such as Aurora, Parker, and Golden, to find new
opportunities.
OCCUPIED
Rising Costs Create Added Pressure
Developers recognize the impact of rising construc-
tion costs and moderating rent growth. Although
there has been a slight pullback in units under
construction, the pipeline of prospective projects
actually is climbing, Ressler notes. “We think those
challenges are going to play to the larger, estab-
lished industry veterans,” he says.
Developers are being more selective in where they
build, too. Development is continuing in gateway
markets and metros that are dense enough to handle
large fluctuations in supply. Conditions also remain
favorable in secondary markets that are leading the FOR RENT
nation in employment growth or where population
growth is driving demand, including key markets
in Florida and the Southwest, Ressler says. Areas
with strong growth potential, like Austin, Texas;
Charlotte, N.C.; and Miami, and strong secondary
and tertiary markets with good economic drivers,
such as a growing technology hub like Boise, are
attracting developers as well, he says.
Decatur, Ga., is a tertiary market where rents are
“going through the roof” due to new construction
that is delivering at higher price points, according to
Jim Brewer, CCIM, broker and owner of Decatur-
FOR RENT
based Brewer Agency LLC. “I have never seen this
much new construction in this small a market in my OCCUPIED
life,” he says. Decatur started working on a pedes-
trian-oriented community about 30 years ago that’s
now in full blossom, attracting young, upwardly
mobile renters, he adds.
Construction costs are perhaps the most signifi-
cant headwind developers are facing. In some cases,
costs for materials and labor have risen nearly 30
percent in the past 18 months.
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