Through the roller coaster year that has been 2020, one area of normalcy for the multifamily industry has been the extent of new construction activity. Though there were some delays earlier in the year, deliveries are on pace to be nearly to the level seen in 2018 and in 2019. After adding around 290,000 new units in each of those two previous years, about 240,000 new units have been added so far in 2020 with November and December numbers still to come.
In addition to other factors, one way to gauge the relative health of the environment awaiting these new units is to look at the amount of time it takes a new property to complete a lease-up phase. ALN refers to this metric as lease-up velocity.
Definitions and Methodology
Before diving into the numbers, let’s review 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 One markets. This is to ensure a reasonable sample size of stabilized properties in a year to allow for relevant comparisons over time.
Tier One Markets Overall
For properties that stabilized in 2015 among these largest 33 markets, the average lease-up velocity was 14.1 months for a basket of 685 properties. Fast-forward to 2020 and for the 855 properties that have stabilized so far this year in Tier One markets, the average time from lease start to stabilization was 15.2 months. These numbers reflect some softening in the aggregate but also illustrate just how active the construction pipeline has remained with the increase in total newly stabilized properties.
Three markets managed to decrease average lease-up time for properties that stabilized this year compared to in 2015 while also having more properties reach stabilization this year. In other words, lease-up duration decreased even as new supply increased. These areas were Sacramento, San Bernardino – Riverside and Minneapolis – St. Paul.
In the majority of markets, lease-up velocity has slowed since 2015, and in a few markets, especially so. In Detroit, the average lease-up duration was 15.5 months for properties that have stabilized in 2020. In 2015 the average was 10.5 months, though considerably fewer properties stabilized that year than the 18 that have stabilized so far this year. The average lease-up velocity for properties to stabilize in Kansas City so far this year was 20.3 months. That is a marked increase from the 15.2 months for about the same number of properties to stabilize there in 2015, and it is also the highest value of any of the 33 Tier One markets by a comfortable margin. The average lease-up time in Nashville has increased from 13 months to 17.1 months even as the number of properties to reach stabilization this year has decreased compared to 2015.
While it can be tempting to attribute blame to the COVID-19 pandemic for the various changes in multifamily performance this year, it is important to be mindful of the trends that precede the onset of the pandemic. One of those trends was an uptick in average lease-up duration over the last few years.
To be sure, the economic and social disruption wrought by the pandemic has played a part, especially by ushering in an elevated level of price sensitivity on the part of residents. Even so, the impact of nearly 1.3 million new units delivered to these 33 markets since the start of 2015 should not be understated.
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