Construction of New Apartments Slowing
A strong indicator of a healthy economy is the pace of new construction. Over the past decade we’ve experienced an unprecedented boom in apartment construction across the United States. Over the course of the past year, it seems that this pace is starting to slow, with the number of apartment building permits declining every month since March reflecting a 9.4% decrease over 2017, which could be an indicator of more to come. What does this mean to you as an investor? Let’s explore.
Why is there a slow down?
Speculations vary as to why this is happening, from high land costs, labor shortages, material costs such as the increased tariffs in Chinese steel that are reported to have increased by 30%, and the recent rise in interest rates. With rising inflation, falling real wages and slower consumer spending, forecasters predict that the overall apartment construction in the U.S. will continue the deceleration that began in 2017.
Construction costs have increased overall. Land costs are significantly higher and the requirements to have a percentage of units that are “affordable” makes for challenges in cash flow and limited returns. And many investors fear potential looming changes in requirements surrounding rent control.
Building codes pertaining to property density regulations differ from city to city, but most city planning commissions don’t like too many units or people in small spaces so plan approvals for high rises is challenging if not impossible.
Meanwhile, job growth is up, and is forecasted to continue well into 2019. In normal years, this would push up a demand for affordable housing in the way of apartments. But many economic forecasts are uncertain, or predicting a slowing in occupancy demand in 2019.
West Coast inventory
West Coast inventory trends vary but show an overall increase year over year. Apartment inventory in Seattle, for example, has shown a 4.2% increase in available units. In Los Angeles, there are 407,785 units with 12,472 more under construction for an overall 3.1% increase.
According to The Real Deal the demand is still high on the West Coast, but a construction labor shortage, along with higher materials costs have slowed new investment, as well as the completion of existing projects, and many developers have become cautious. Interestingly, 87% of all U.S. rentals constructed in 2018, were for high-end units. Nationally, that’s 8% higher than in 2017. However, specifically in California, the percentage of high-end apartment construction was just 64%.
With this continued rise, there is concern that the markets may be flooded in 2019, and supply may well outstrip demand here, an event that CoStar is predicting could last another five years.
Positioning for the future
Will 2019 be a tough year for construction? Is a recession on the near calendar? All good questions, but answers now must be only forecasts. Expansions certainly don’t last forever and these changes will likely vary from market to market, even neighborhood to neighborhood. Getting the best data that specifically pertains to your investment and analyzing it is key, prior to making any changes.
If you are considering how and where to best position yourself in the current marketplace, it’s important to have all the pieces to the puzzle in terms of history, landscape, environmental and demographical factors and cultural trends in your given area. While your broker, your lender, your investment manager or your property manager could certainly weigh in, having a completely unbiased perspective is key. If you’re looking for a second option, we are here to help you navigate potential risks and rewards.
Click here for more information on how Urban Advisors can help.