As a surge of new luxury apartment construction begins to slow in the Triangle, the region is about to find out whether developers’ unbridled optimism in the health of the sector will be rewarded.
“We’re entering somewhat of an unknown period where we don’t have big history of big volumes of high-end rents,” said Marcus Jackson, managing director of urban investments for TradeMark Properties in Raleigh. “Are there enough 30-year-old lawyers and empty-nesters that can afford those rents? Everybody is saying yes.”
A total of 7,965 new apartment units have been completed in the Triangle over the 12-month period ending in September, according to MPF Research, which analyzes apartment data in 100 U.S. metro markets. That is easily the largest amount of new supply added over a 12-month period in the 20 years that MPF has been tracking the Triangle.
According to MPF, demand for new units over that same period totaled 6,940 – a hefty number but still below supply.
The new supply has helped slow rent growth in the Triangle. Rents were up 1.7 percent in the third quarter compared to the same period a year ago. That was well below the 3.7 percent average increase across the United States.
Apartment developers who remain bullish on the Triangle say their projects are still performing as expected in terms of the rents they are able to charge and the pace at which they are able to lease units. They also point to a number of macro changes taking place in the housing industry – most notably a desire among more young people and empty-nesters to be renters by choice.
The Triangle’s job growth, while slow by historical standards for the region, also continues to outpace the nation. Another encouraging sign is that demand did outstrip supply in the third quarter, with 2,788 apartment units being leased compared to 2,450 units coming on the market.
Still, it remains to be seen how much developers can continue to push rents given that wages have been largely stagnant during the recovery.
“If you can only afford X dollars in mortgage, well then, that tells you you can only afford X dollars in rent,” Jackson said.
There are already signs that developers have begun to show more discipline in launching new projects.
The number of apartment permits issued in the Triangle over the 12-month period in September was down 38 percent from the previous 12-month period, according to MPF. After peaking in the fourth quarter of 2013 at 11,265 units, the number of apartment units under construction here stood at 7,000 units in the third quarter of this year.
“The Triangle is one of the few hot development markets nationally where multifamily permitting levels have really nose-dived of late,” Jay Parsons, a market analyst with MPF, wrote in an email this week. “ Assuming supply levels continue to ease, we expected rent growth levels to continue to pick up.”
(It’s important to note that MPF’s 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.)
Jackson said the decline in new starts was likely both a sign of discipline and of other factors that are affecting the wider real estate industry. One of those is rising construction costs. Another is the dwindling supply of quality land sites.
You can’t put a luxury apartment complex on every street corner, even if developers in some parts of the Triangle are doing their best to prove otherwise.