It’s the season of giving, and in the last handful of years, the multifamily industry has been in a giving mood when it comes to new units. New supply has continued unabated from coast to coast, especially in the larger markets, and there is no slowdown in sight for some areas.
One metric that ALN tracks related to new construction is stabilization rate. By this we mean the average time it takes a new property to reach 85% occupancy or 9 months after all construction is completed, whichever comes first. Fortunately, for that last couple of years, it’s always been the former. Let’s have a closer look at these rates for conventional properties in the ALN Tier 1* markets. To do this, we will use stabilization rates for properties that reached 85% occupancy in 2016, 2017 or 2018.
On a national level, deliveries in these markets have hovered around 250,000 conventional units annually for the last three years. In that time, the average stabilization rate has slowed from about 14.5 months in 2016 to 15 months in 2018. A two-week slowdown in lease-up rate after more than 750,000 new units have entered the market is not a significant erosion. However, on a market level conditions are varied.
One of the factors we evaluate is the relationship between lease-up rate and the volume of new supply. The average number of new properties added annually by market from 2016 to 2018 was 24. While the number of new units across Tier 1 has been relatively stable over that span, the new units were obviously not evenly distributed across markets. Given that, we can add a layer of analysis and consider stabilization rate performance relative to the level of new supply.
Some markets around the country have managed to decrease the time it takes for new properties to reach 85% occupancy over the last few years. Interestingly, these markets are dispersed around the US rather than being concentrated in a specific region. Most encouraging are the markets that improved their lease-up speed while also delivering above-average levels of new properties.
Areas such as Phoenix, Los Angeles, Chicago, Boston and Charlotte each decreased their average time to complete a lease-up from 2016 to 2018 while also delivering more than 24 properties in a year at least once during that time. Even better, Washington DC, Atlanta, New York, Austin and Seattle each improved in stabilization rate while introducing above-average quantity of new supply in all three years.
The average number of months to stabilization in this group for 2018 was 14.2, compared to the 15 months overall for Tier 1 markets. Seattle led the way at 11.4 months. New York, with a whopping 72 properties, was number one by far in this group for new supply in 2018. Areas in this section are building more than others, and they have the continued demand to pull it off.
Not every market can build and build while seeing those new properties fill up faster and faster. Some have seen their stabilization rate improve but have not added properties to the same degree. Areas like Sacramento, San Bernardino-Riverside, Orlando, Indianapolis, Minneapolis-St. Paul, Raleigh-Durham and San Antonio fit this bill. Once again, it’s encouraging to see the geographic diversity in this group.
The average lease-up rate in this group is 15 months, right on par with Tier 1. San Bernardino-Riverside paced the field at 12.5 months this year and Minneapolis-St. Paul had the most new supply with 24 newly leased-up properties. To this point, markets in this group have taken advantage of this unusually long cycle without being overzealous with construction.
Other areas have gone all-in with new construction, to the detriment of their stabilization rate. Markets in this group have added more than the average number of properties, but it’s taking longer to fill them than it did back in 2016. San Francisco-Oakland, Denver-Colorado Springs, Dallas-Fort Worth and Houston all find themselves in this group. What’s interesting about these four areas is that apart from Houston due to the state of the energy sector for much of the last handful of years, these markets are generally thought of as growth markets.
For Denver-Colorado Springs, Dallas-Fort Worth and Houston, it could be that new supply has been either too much too fast, or too much for too long. In the case of the Texas markets, each has more than doubled the Tier 1 average for new properties every year for the previous three. In fact, Houston in 2017 brought more properties online that the average market in this group would have in three full years. Denver-Colorado Springs has been less aggressive by comparison, adding ‘only’ 30-35 properties each of the three years.
San Francisco-Oakland is a little different than those other three. Despite being in this group, its lease-up rate is better than the Tier 1 average—and by a wide margin. The reason it’s in this group is that the market added more than 24 properties two of the three years, and the average length of time for a property to exit lease-up has increased from 11.3 months to 12. So despite technically fitting the criteria for this group, conditions in the market are not all that comparable to the other three.
New supply has been arguably the main storyline for the industry for a few years now. We’ve seen some pressure on average occupancies and average effective rent growth as a result. Additionally, some areas, depending somewhat on their level of new development, have seen changes in the amount of time required to stabilize these new properties. While it is clear select markets should consider tapping the brakes, others are still finding strong demand.
The picture is mostly positive. There are more markets in ‘The Best’ category than in ‘The Good’ category and more in ‘The Good’ than in ‘The Bad’. Even areas that find themselves in the latter group are not all that precariously positioned, at the moment.
*ALN Tier 1 markets are the 34 largest markets in the nation by unit count
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