Part 2: New Supply in the Current Demand Environment

In the first part of this two-part installment contextualizing upcoming multifamily new supply, new properties still in lease-up were evaluated according to the share of average net absorption accounted for by those units. A three-year average calculated for market-level net absorption in the 2020 through 2022 period was predominately used, but an average for the pre-pandemic period from 2017 through 2019 was derived as well for additional perspective.

In this second installment, the other component of new supply will be evaluated: projects currently under construction but that are not yet leasing. These properties will be the new supply entering markets in 2023 and 2024 and will thus be impacting the multifamily industry in the near term.

Units Under Construction – Primary Markets

The top five primary markets according to units under construction as a share of current market stock will probably surprise no one. Miami-Fort Lauderdale (18%), Austin (14%), Nashville (14%), Raleigh-Durham (14%), and Orlando (13%) have been in-migration hotspots for some time. It is certainly no coincidence that some of the fastest growing Sunbelt markets in the country top this list of upcoming new development once adjusted for market size.

Encouragingly, the four markets head and shoulders above the rest for current lease-up stock mentioned in part one of this series are nowhere to be found atop this ranking. Of those four – Dallas-Fort Worth, New York, Houston, and Phoenix – only Phoenix at tenth cracked the top ten.

The focus here though is less on size-adjusted supply and more on demand-adjusted supply. As with market-level lease-up supply, some different areas come into focus when considering current stock under supply relative to average annual absorption in the 2020 through 2022 period.

Once again, New York is the leader here. About 85,000 units currently under construction equates to 8.5 years of absorption from that three-year period. Of course, New York was particularly hard hit during the pandemic era. Using average annual net absorption from 2017 through 2019 instead improves the metric to 4.5 years, but that would still be tenth highest among primary markets if used rather than the 8.5 value.

Sacramento provides an example of the inverse. Around 6,700 units under construction is the equivalent of just more than seven years’ worth of average annual net absorption and good for second place if the average is calculated from 2020 through 2022. And yet, if the 2017 through 2019 period is used as the average, upcoming new supply equals thirteen years of average absorption.

Raleigh-Durham, Washington DC, and Miami-Fort Lauderdale round out the top five with Each having between five and seven years of demand under construction. San Diego, Dallas-Fort Worth, Kansas City, and Houston are the only primary markets in which this metric is currently below two years.

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Units Under Construction – Secondary Markets

There are the same number of secondary and tertiary markets with units under construction equal to at least 10% of current stock as there are primary markets despite there being three times as many secondary and tertiary markets. This would seem to indicate that new supply pressure this year and next will predominately be a primary market issue.

While it is true that supply pressure is likely to be more acute within the primary market subset, there are certainly specific smaller markets that may feel the same pinch. With the general rule of thumb that projects currently being built would be expected to begin leasing within two years based on a current national average construction duration of around 20 months, five secondary markets stand out.

Pittsburgh, Palm Beach, and Tucson each have a little more than 4.5 years of average net absorption in the current pipeline across projects that have already broken ground. For Jacksonville and Birmingham, the demand-adjusted supply metric stands at just over four years.

Relative to some of the data discussed among primary markets, despite these areas leading the way for secondary markets, the supply pressure this year should be less severe. This is partially due to upcoming supply looking better relative to demand, but also due to the fact that only Palm Beach and Jacksonville of this group of markets that have been mentioned have 10% or more of existing stock in the construction phase of the pipeline.

Units Under Construction – Tertiary Markets

The situation is a bit different within the tertiary markets group. In Gainesville, about 2,700 units currently under construction is equal to twelve years of average absorption. When using the 2017 through 2019 period for average demand, the metric drops to 8.5 years – still one of the highest in the country.

Columbia, SC is another noteworthy case. Around 2,000 units currently under construction corresponds to more than ten years of average apartment demand using 2020 through 2022 as the period to derive average demand. When using 2017 through 2019, upcoming supply accounts for only about three years of average demand. As with New York, this is likely an example of a market that struggled more than average during the pandemic period. Like Gainesville, Columbia is a college town.

Albuquerque, Reno, Lexington, Huntsville, Rapid City, Honolulu, and Flagstaff each have more than five years of average demand in current construction stock while New Orleans, Madison, and Savannah are each over four years. For each of these markets with the exception of Rapid City and Huntsville, the number of units currently under construction is less than 10% of existing stock. However, it does not require a flood of units to create some new supply pressure in small markets with average annual net absorption that in some cases sits below 500 units.

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