BOSTON -- Talk of an "apartment bubble" fills seats at conferences on each coast and is the subject of many a closed-door meeting amongst investors. The development of multifamily space across the United States has been unabashedly robust over the past year, leaving many anxious about the impact it will have on market conditions. With nearly 200,000 multifamily units delivered nationwide in 2012, it's a legitimate worry. But to paraphrase the great Mark Twain, reports of overbuilding are greatly exaggerated, as the number necessary to sustain demand fell short by 100,000 units. According to Jones Lang LaSalle, a deep dive into historical delivery levels points to a healthy outlook for 2013 and well into 2016.
"The multifamily market is still playing catch-up, as supply remains depleted. Development will continue to grow at a solid pace in 2013 with approximately 260,000 units expected to come online, while demand requirements outpace the supply pipeline. This year, expected deliveries of new product will be 12 percent below historical average delivery levels," said Jubeen Vaghefi, International Director and leader of Jones Lang LaSalle's Multifamily Capital Markets.
According to Jones Lang LaSalle Senior Vice President and Multifamily expert Michael Coyne: "Downtown Boston is undergoing an exciting transformation as residential developers respond to strong demographics, exceptional fundamentals, and a new trend towards a live, work, play lifestyle. Over the next four years, JLL estimates that approximately 13,500 units will be delivered in the Greater Boston area. This delivery level of 3,375 units per year is far below the 5,000 units per year delivered in 2004 through 2008.
"There is pent up demand from a development lull," Michael continued, "where less than 700 units per year were delivered from 2009 through 2012. Further bolstering the the area's multifamily outlook, household formation, which is the main driver for demand, is estimated to increase from its historical level 0.5% to 0.8% for the next five years."
Urban Land Institute's Emerging Trends in Real Estate 2013 report also projects room for new supply, "Some fallow development years have further tightened many markets as developers are only now begin to catch up. In high-barrier-to-entry places, particularly metropolitan areas along the coasts, new projects may have trouble keeping up with demand, resulting in mid-to-low single-digit vacancy rates and rent spikes, and extremely solid appreciation. So long as these trends continue, over the long term apartments should continue to outperform all other property types on a risk adjusted basis, with excellent cash flow components."
Nationally, multifamily development hasn't skipped a beat, as government-sponsored enterprise's (GSE) Fannie Mae and Freddie Mac fueled the market as a continued source of lending for the exit of development projects, while construction lenders have stepped up at the dirt level. Favorable interest rates and attractive capital made development in the wake of the downturn possible for this sector. As the multifamily market continues to expand in 2013, the National Multi Housing Council expects that most markets will adjust to the changing landscape of needs, "Development activity continues to increase in most markets, with just over half (53 percent) reporting a substantial pickup in land acquisition, lining up financing, and getting building permits, though not yet much in the way of actual construction starts. An additional 20 percent said that developers have been breaking ground on new projects at a rapid clip."
Although the national market remained buoyant, some metro areas continue to lag behind the multifamily bandwagon, and are in desperate need of new supply. Jones Lang LaSalle surveyed 28 metropolitan areas and found that nearly 70 percent of regions will have triple or quadruple digit supply growth this year over 2012 levels. Markets that are supported by economic job growth will draw the millennial and the baby boomer generations back to the urban core and surrounding suburban pockets. South Florida, Las Vegas, Phoenix, Chicago and Los Angeles will be some of the top markets for supply deliveries in 2013.
"While markets like South Florida will experience outsized deliveries in 2013, in reality, those numbers are a fraction of what we've seen in the past—just 40 percent of the historical annual average. After several years of meager deliveries, the sector is finally starting to respond to demand in the marketplace. We've got a long way to go before we cross that •bubble' threshold—this pipeline is in no danger of bursting," concluded Vaghefi.