One important aspect of the impact of new market conditions on multifamily performance is the rate by which new properties reach stabilization. It is still too early to really quantify the full impact because properties are generally in a lease-up phase for more than a year and we are only about six months into this new paradigm brought on by COVID-19. However, we can look at how long it took to reach stabilization for properties that completed the lease-up phase in 2020 compared to properties that stabilized a few years ago. This at least provides a picture of what market conditions were like for new supply coming into this disruptive period.
Definitions and Methodology
Before diving into the numbers, a brief breakdown of some terms and methodology for properties and markets to be included in the evaluation. ALN defines stabilization as the point at which a new property reaches 85% total occupancy or 12 months after the property has completed all construction and received its final Certificates of Occupancy – whichever comes first.
Only conventional properties of at least 50 units are included in the lease-up velocity calculation. This excludes properties that operate in an environment with strong influences other than supply and demand, properties that are more difficult to collect reliable data for and properties that are so small a lease-up measure is not relevant relative to larger properties.
Lastly, by lease-up velocity we mean the number of months between the lease start month and the stabilization month for a property.
For this specific analysis, only the largest 33 markets in the US by multifamily unit count will be included – what ALN terms Tier 1 markets. This is to ensure a reasonable sample size of stabilized properties in a year to allow for relevant comparisons over time.
Tier 1 Markets Overall
In 2016, the average lease-up velocity for these 33 largest markets was 14.3 months for a pool of about 950 properties. Two years later, for properties that stabilized in 2018 in these markets, the average time from lease start to stabilization was 14.5 months. While this does represent a negligible increase in lease-up time, there were also about 200 more properties represented compared to 2016. So far in 2020 there have been just over 400 new properties to reach stabilization in Tier 1 markets, and the average lease-up lasted 15 months.
There were a handful of markets where total lease-up time decreased for properties that stabilized in 2020 compared to 2018. But, almost without exception, these areas were on-pace for far fewer stabilizations this year than in 2018. There were two exceptions, with the first being Sacramento. That market is on-pace to surpass 2018 stabilizations and the average lease-up period decreased from 14.3 months for properties that stabilized to 2018 to 12.5 months for properties that stabilized in the first half of 2020. The other exception was Washington DC. In that area, the number of properties to stabilize in 2020 puts DC at the same pace as 2018, but the average lease-up duration for properties that stabilized in 2020 was 14 months compared to 15.4 in 2018.
Five markets around the US have seen an increase of at least three months in average lease-up duration compared to properties that stabilized in 2018. Two of those five markets, Charlotte and San Diego, are on pace to have as many, or more, newly stabilized properties in 2020 than in 2018. In San Diego, 10 properties have already stabilized in the first half of this year, while 16 properties did so in all of 2018.
It’s the remaining three markets where there has been a reduction in the number of properties to stabilize this year as well as increases in average lease-up duration in excess of three months. In Phoenix, the average lease-up took 16.3 months for properties that have stabilized so far this year, up from an average of 12.7 months in 2018. 15 new properties have stabilized there this year, and 35 properties stabilized in Phoenix for all of 2018.
In Orlando, the average lease-up took 16.5 months for the 10 properties to complete the lease-up phase this year. That is up from 13.4 months in 2018 for 31 such properties. Lastly, the four Las Vegas properties to stabilize so far in 2020 took an average of 15 months to complete lease-up. That is up from 11.7 months for the 13 properties to stabilize in 2018.
We won’t have a full picture of the impact of the COVID-19 disruption on lease-up properties for some time. However, a few things are apparent in the data for properties that have stabilized so far this year. The first is that for these largest 33 markets, the number of properties to reach stabilization in the first half of 2020 was less than 40% of the 2018 total. It’s worth noting that this has not been due to a lack of new supply in these markets.
Secondly, the rate of increase in average lease-up duration is expanding. From 2016 to 2018, there was an increase of less than one week at the average for Tier 1 markets. From 2018 to this year, there was an increase of two weeks at the average.
Lastly, markets like Las Vegas, Orlando and Phoenix saw some of the largest increases in lease-up time combined with substantial reductions in the number of properties to reach stabilization compared to the pace set in 2018.
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