Exactly how strong has the multifamily market been in 2017, and what can we expect in Q4? Projections at the end of 2016 predicted continued growth at a slower, more regulated pace than years prior.
So far, all evidence suggests this is the case. While the market appears to still be in a boom, certain trends have sent mixed signals that suggest minor slowdowns. As we wrap up Q3 and head into the holiday season, here’s a look at where the market stood at the close of Q2.
A Slight Decline in Rent Growth
Projections by Freddie Mac at the beginning of this year suggested that rent increases would moderate in previously high growth areas such as Atlanta and Seattle, while rents in areas that experienced slower growth last year, including cities in the Bay Area, were expected to climb this year. In New York City, rental prices were expected to decline this year due to a surge in supply to the market. And by the end of second quarter, all of these predictions were supported. Despite this slight decline in growth rate in most regions, we can still anticipate an overall increase year over year albeit at a more moderate pace.
Less Permits, More Completions
Permitting for new multifamily development has dropped as expected over Q2, although unadjusted rates are still high compared to previous years. Meanwhile, development completions were up each quarter, filling the market with lease ups. It is expected by end of year that 389,000 new units will be delivered, with many of them hitting markets in Dallas, New York, and Houston. However, given the recent hurricanes that have devastated Texas and Florida, as well as the rampant fire destruction on the west coast, there is some question as to whether these projects will continue on track for 2017 as worker shortage may impact deadlines when workers move to these hard hit areas to assist in rebuilding efforts.
A Slight Uptick in Vacancy Rates
The increase in completions across existing developments has caused corresponding increase in vacancy rates as Q2 came to a close, bringing rates of to 9%—the highest Q2 vacancy rate we’ve seen since 2013. However, although supply is slightly outpacing demand, tight vacancy rates at the end of 2016 have led to predictions that vacancy rate increases will trend downward for the remainder of 2017. And with the unknown status of labor supply in the wake of recent natural disasters, it is uncertain whether supply will continue to outpace demand for 2017.
Keeping Up With Demand
Despite the increase in completions and higher vacancy rates at the end of Q2, net absorption across the market remained positive and reached a record high. Southern markets such as Dallas, Austin, and Nashville have shown particularly high absorption, with each reaching absorption rates of 3.2% or more over the past 12 months.