Nadia Balint 
New York City remains one of the hottest rental markets as apartment construction hits a new record high this year. Apartment construction has been unstoppable, with thousands of new buildings under development all over the country. Is it enough? Is it too much? What will the impact of this volume be on the market?
New Record Level of Apartment Completions in 2017
A new analysis of apartment construction in 2017 performed by apartment search website RENTCafé, based on Yardi Matrix data, reveals that over 345,000 rental apartment completions are expected this year. That’s 21% more than the 285,000 completed last year, and well above the average completions seen in the run up to 2006.
NYC reigns as the nation’s favorite playground for developers, with the most completed and projected to be completed apartment units in 2017. In total, the New York-Newark-Jersey City metro area expects 26,739 new units to hit the market this year. Here’s a breakdown by borough:
Top U.S. Metros for Apartment Construction in 2017
Confidence in the market, access to capital, and demand for yield has been driving new construction across America. 19 of the top 20 U.S. metros are getting over 5,000 new rental units this year. Notably, half of the country’s new supply is concentrated in the top 13 metros, while the other half is spread among the rest of the 134 metro markets studied. The following top 20 metropolitan areas are leading in number of units to be completed in 2017:
How Much New Construction Can The Market Handle?
One of the most pressing questions industry professionals and investors are asking themselves is “how much more new construction can we handle?”
Some have voiced concerns over the velocity and volume of new construction in general, but especially in hot markets like Miami, FL. Still, apartment experts at RENTCafé report that NYC building owners are still enjoying 97.5% occupancy rates in 2017. The National Association of Realtors and various local associations have continually pointed to a lack of inventory as being a major problem for the overall U.S. real estate market. That has helped push rental rates up almost 50% in the last 5 years, while median home prices have also reached new highs in 2017.
Of course, this is only true for some markets. All real estate is local. In certain places, rental rates have been slowing, with 6 of the most expensive markets seeing declines as of May 2017. This includes San Jose and Boston. The average rent in Houston has also dropped by 1.1% y-o-y to just $1,041.
A variety of dynamics could add more fuel to this downward trend too. The new mobile workforce is location-independent and does not need to be held ransom in major cities in order to keep jobs and income. Easier access to mortgage loans, low-interest rates, and high rental asking prices, with tenant application processes which are often tougher than qualifying for a home loan could drive many more households to buy instead of rent. This is already putting increasing pressure on landlords and leasing agents to negotiate with new prospective residents and to work harder to keep existing tenants.
How Much More New Apartment Construction Is Actually Needed?
Despite the concerns of construction cranes flooding the airspace of America’s major metros, and competitiveness among apartment buildings, data suggests we are still far behind the volume needed to provide for growing housing needs.
The National Multifamily Housing Council projects that we will need over 4.5M new apartments delivered by 2030, in order to keep pace with demand. That is around 373,000 units per year. We are far, far, behind those numbers. The United States is projected to remain the world’s third most populous country, at least through 2030. The North American population has grown at every estimate since the year 1000, with the exception of 1700 to 1750. The UN estimates world population will soar from 7.5B in 2017 to almost 11B by 2100. The need for shelter is only growing.
There are two additional factors which industry professionals may need to factor in when assessing the impact of this new construction. The first is how many other rental units are in the market. We have low home vacancy rates, NYC foreclosures soared to new highs in Q2 2017, and tens of thousands of homes have been converted to long-term rentals by both private individual investors and large hedge funds over the past few years. There is even more rental inventory beyond large-scale developments. Second, other economic factors influence housing demand. Hypothetically, a major downturn in the stock market would affect tenant quality and ability to pay high rents, in which case we would see demand for rental housing go in a different direction.
Summary
Apartment construction has hit a new high in 2017. Still, apartment completions are well below what is needed. Whether construction stays on track or not may depend on access to credit and rental pricing trends. Global investors are still hungry for yield, and set a new record for investing in U.S. real estate in 2017, which could support more building. More action could be great for some industry professionals. Though it appears that renters are the real winners of this new windfall, as landlords compete for residents.
Methodology
RENTCafé is a nationwide apartment search website that enables renters to easily find apartments and houses for rent throughout the United States.
To compile this report, RENTCafé’s research team analyzed new apartment construction data across 134 U.S. Metropolitan Statistical Areas. The study is exclusively based on apartment data related to buildings containing 50 or more units. New supply refers to 50+ unit properties which have a completion date projected for 2017.
Building and rent data was provided by our sister company, Yardi Matrix, a business development and asset management tool for brokers, sponsors, banks and equity sources underwriting investments in the multifamily, office, industrial and self-storage sectors.
Data on population changes from 2015 to 2016 comes from the U.S. Census Bureau. Job growth data was provided by the U.S. Bureau of Labor Statistics and refers to 12-month percent changes in metropolitan area nonfarm payroll employment from May 2016 to May 2017.
