A Comparative Look at New Supply: Part Two

In the November edition of the monthly ALN newsletter, upcoming new supply by market was evaluated through the context of recent demand for those market. For the most part, the newsletter focused on markets in which upcoming new supply is particularly high relative to the apartment demand in recent years.

As a follow-up, in this space, some markets will be looked at that fall on the other side of the spectrum. Specifically, larger markets that have less than two years’ worth of supply currently under construction as based on their average annual net absorption derived from the last five years.

Low New Supply, Variable Demand

Most markets with little to no units under construction are smaller areas ranging from secondary to micro markets. However, there are ten markets with more than 1,500 multifamily properties with less than two years’ worth of demand represented by their volume of units currently under construction.

A through-line for all ten markets is that despite recent demand being something of a mixed bag, the number of units under construction in each area is below the market-level national average once adjusted for market size. In other words, none of the ten markets has less than two years’ worth of supply upcoming due to an active new construction pipeline meeting outsized demand.

This represents a difference from the markets mentioned in the November newsletter. The parts of the country with especially high upcoming new supply broke into two baskets – those with an active new construction pipeline paired with high (but insufficient) demand, and those with an active new construction pipeline with low demand.

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High(er) Upcoming New Supply and Above-Average Demand

The three largest markets of the ten are Chicago, Houston, and Portland. Each currently has between 1.6 to 1.8 years’ worth of demand in units under construction. While all three markets have below average upcoming supply nationally, the pipeline is active relative to the other markets in this group of ten. Nationally, the average market has about 6% of existing stock currently under construction. The average for the basket of ten properties being looked at here is 3%. In Chicago, units under construction account for 4.6% of existing stock, and that metric equals 4.3% and 3.8% for Portland and Houston, respectively.

Another point of similarity is that recent demand has not been otherworldly but has been better than the market-level national average. Average annual net absorbed units from the last five years equal 1.9% of existing stock for the average market nationally. For New York and Portland, average annual demand has totaled 2.7% of existing stock and in Houston that figure was 2.1%. For these three markets, below average upcoming new supply and slightly above average recent demand result in a low total for years’ worth of supply represented by units currently under construction.

Two other markets that fit this bill, though smaller than the three aforementioned areas, would be St. Louis and Kansas City. Each has a below-average number of units under construction relative to their size but are at the high end for this ten-market group. Each also has above-average recent demand once adjusted for size – and the result is 1.8 years’ worth of upcoming supply for Kansas City and 1.9 years’ worth of supply for St. Louis.

Low Upcoming Supply and Low Demand

Detroit, Buffalo – Rochester, Cleveland – Akron, Pittsburgh, and San Joaquin Valley make up the remainder of the ten markets and all fall into this latter category. Whereas the national average is 6% for units under construction as a share of existing stock, and the average for this basket of ten properties is 3% – all five of these markets are below 3%.

At the lowest point is San Joaquin Valley where fewer than 2,000 units under construction account for just 1.3% of existing stock. As a result, its 1.3 years’ worth of supply value is the only one of these five markets not to fall between a 1.6 and 1.7 value. Its average annual net absorption as a share of existing stock equals 1% – roughly half the 1.9% national market average.

Pittsburgh and Buffalo – Rochester were the closest of these five markets to meeting the national average for size-adjusted recent demand. The Pittsburgh value of 1.8% fell just shy of the 1.9% national average, while Buffalo – Rochester was slightly lower at 1.5%. Both were also closest to the 3% average for this ten-market basket in units under construction as a share of existing stock at 2.9% and 2.6%, respectively.

Detroit and Cleveland – Akron provide the middle ground for this group of markets. Of particular note here would be the very low demand figure for Detroit. Average annual net absorption over the last five years of approximately 3,100 units equals just 0.8% of existing stock – less than half the national market average.

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Among larger markets not expected to see the same new supply pressure over the next eighteen to twenty-four months as in many areas around the country, the primary reason is not that robust demand is there to meet the new units, but rather a relative dearth of new units.

That is not to say that apartment demand has been poor in all of these markets. A handful have seen average net absorption slightly above the national average. Nonetheless, it is the lower volume of upcoming new supply in those markets that should maintain a balance in those areas between new supply and apartment demand in the coming year.

Looking ahead to 2024, market-level performance is likely to be primarily dependent on the extent of new supply entering the market during a period of continued uncertainty and inconsistency. Perhaps thankfully, new supply is expected to be less of a force in the multifamily industry in 2025 and 2026.

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