Few topics have received more attention in this column over the past few years than apartments.
While other types of commercial real estate have seen little new construction, scores of apartment projects are now coming out of the ground. So many, in fact, that during a recent National Association of Real Estate Editors conference in Atlanta, the Triangle and Washington were cited as two apartment markets that were in danger of being overbuilt.
Is this the case?
There’s no question that the Triangle is experiencing an unprecedented level of new construction, which is being driven both by regional players who have long been active here and new investors.
In a typical year, a 3 percent increase in a market’s apartment inventory is considered aggressive. The Triangle’s inventory is expected to grow by 6.4 percent, or 8,017 units, over the next 12 months, according MPF Research, which analyzes apartment data in 100 U.S. metro markets.
That would shatter the previous 12-month record for most new construction – set in the third quarter of 2001 – by nearly 2,000 units, according to MPF, which has been tracking this market for two decades. The only other market experiencing this type of growth is Austin, Texas, which is expected to increase its apartment inventory by 6.2 percent over the next year.
(A note about MPF’s numbers. Its under-construction figures include off-campus student housing projects and low-income tax credit projects, which will not compete with the other apartment complexes being built.)
It’s not surprising that the Triangle is experiencing a construction boom given what’s happened in the single-family housing market and the fact that almost no new projects were built in the years immediately after the recession took hold.
Jay Parsons, a market analyst with MPF, said investors flocked to the Triangle with the expectation that it would be among the best performing markets in the country. This region avoided a major drop in rents and rise in vacancy in 2008 and 2009, which made it extremely attractive once financing became widely available in 2010.
But while the Triangle market’s performance in recent years has been good, many were expecting it to be even better.
“This is really a story about expectations versus reality,” Parsons said. “Expectations were sky high, and the Triangle just hasn’t quite been able to live up to that.”
Triangle apartment rents have risen 11.9 percent over the past three years, which is just slightly above the national average. Charlotte, by comparison, saw rents increase 13.7 percent over that same period.
Look for warning signs
MPF is predicting that the Triangle market will take a big hit over the next few years as all the new inventory comes on the market. Late-opening projects with high construction costs are likely to be hit hardest.
“Demand should be strong, just not enough to keep pace with supply,” Parsons said, noting that the region’s current pace of job growth is not strong enough to absorb a record number of new apartments.
New supply should return to normal levels in 2015, as MPF is already seeing a slowdown in new multifamily permits in the Triangle, Parsons said.
The apartment market is cyclical, and we are likely at the peak of the new construction curve in the Triangle. As long as developers and investors pay attention to the warning signs – recent history shows this is far from guaranteed – the long-term outlook for the sector should remain favorable.