The U.S. Census Bureau posted its January residential permitting numbers by metropolitan statistical area (MSA) on Wednesday, February 27. Privately-owned housing units authorized by building permit in January, measured on a seasonally adjusted annual rate (SAAR), were 925,000. This was an increase of 1.8% from the revised December rate of 909,000, and was 35.2% above the January 2012 estimate of 684,000. During January 2013, annual multifamily (MF) permits increased by 44.3% at the national level from the comparable period a year ago. Even with this increase, annual MF permitting activity was 1.9% below the long-term average. With the January 2013 MF permits at 274,640 units, annual MF permitting has now been above 200,000 for 15 consecutive months. The anticipation of moderating but still healthy apartment market fundamentals over the next two years is stimulating developers and investors to start new projects. Even with the first waves of permits issued during this upward cycle being turned into completions this year, completions will still remain slightly below the long-term historical average for the U.S. and most MSAs. By 2014, most MSAs will see their inventory growth pass the historical average. However, there are some MSAs, like Charleston, Raleigh, Washington, DC, Baltimore, Austin, Nashville, Philadelphia, and Seattle, where new supply will outpace the historical average rate this year.
Apartment market fundamentals remained stable in January 2013. Nationally, annual effective rent growth in January 2013 was 3.6%, down from 4.0% over the same period a year ago. Annual effective rent growth has remained at or near 3.6% since June 2012. Occupancy remained at 94.1% for the second consecutive month and was up from a rate of 93.4% in January 2012. U.S. apartment occupancy is forecasted to peak at 95.2% in 3Q13 before the effects of the supply pipeline are felt, at which point occupancy is likely to decline. Effective rent growth is forecasted to remain close to 3.6% through 2013 before moderating to an average of 3.4% in 2014.
The top ten MSAs for MF permitting for the trailing twelve months ending January 2013 were: New York, NY (14,730 units); Houston, TX (14,604 units); Austin, TX (11,424 units); Dallas, TX (11,367 units); Los Angeles, CA (8,985 units); Seattle, WA (8,943 units); Denver, CO (8,109 units); Washington, DC (7,820 units); Raleigh, NC (6,268 units); and Charlotte, NC (5,586 units). With urban infill locations accounting for the bulk of the supply being delivered this year, construction activity is now spreading to the suburbs of these MSAs as developers look for more opportunities. Some of the top MF permitting places on a trailing twelve-month basis through January 2013 were: City of Houston (8,963 units); City of Austin (7,600 units); City of Seattle (7,070 units); City of Los Angeles (6,165 units); City of Dallas (5,450 units); Mecklenburg Co., Charlotte (4,682 units); and City of Denver (4,511 units).
Multifamily Permitting Continues To Ramp Up
For the U.S. over the trailing twelve months ending in January 2013, MF permitting increased 44.3% or 84,308 units from the January 2012 figure of 274,640 units. Over this same period single-family (SF) permitting was up by 24.1% (101,575 units) to 523,721 units (figures are over the comparable period a year ago, not seasonally adjusted (NSA) basis). MF permitting is nearing the long-term annual average of approximately 280,000 units (see chart below) after bottoming out at 121,125 units in 2009, though the rate is well below the 2005 peak of 389,300 units. At its present pace, MF permitting should exceed the long-term average later this year. SF permitting is lagging the MF recovery and is 48.9% below the long-term average. The pace of single family permitting is expected to remain below the long-term average through the first half of 2015.
Privately-owned housing starts in January 2013 measured 613,000 (SAAR), up 0.8% from the revised December 2012 rate of 608,000 and 20.0% from the January 2012 rate of 511,000. The 613,000 January starts were the highest monthly total since June 2008. January 2013 annual MF starts slowed to 260,000, which was 26.1% below December 2012 but 34.7% above January 2012. There have been more than 200,000 MF starts each month since June 2012. In 2012, MF starts exceeded 200,000 in every month except January (193,000) and May (178,000).
Class A Properties Impacted By New Supply
The surge of new supply coming online in 2013-2014 will further moderate rent growth and the occupancy rate for existing Class A properties. The first wave of development properties coming online this year will put more pressure on the already declining rent growth of Class A properties. Because of this, effective rent growth for Class A assets is forecasted to slow to 3.1% this year, down from 4.0% in 2012. The Class B and C properties are forecasted to have average annual rent growth of 3.6% and 4.2%, respectively, this year.
The occupancy rate of Class A properties is expected to fall from 95.3% to 95.0% in 2013 and 94.3% in 2014 as more units are delivered into the market. On the other hand, the occupancy rate for Class B and C properties will continue to increase through 2013 and into 2014 as renters move from more expensive units.
Single-Family Market Recovering, However Homeownership Rate Remains Well Below Long Term Average
Existing home sales in January 2013 increased 0.4% from December and were 9.1% above the January 2012 level according to the National Association of Realtors. Annual home prices were up for the eleventh consecutive month in January 2013. The median price of single-family homes in January 2013 was $174,100, which was up 12.3% from January 2012. The inventory of single-family homes at the end of January 2013 was down 4.9% from December, and was at its lowest level since April 2005. This situation will turn around as the low inventory drives prices higher, allowing underwater homeowners to put their properties on the market. The homeownership rate fell to 65.4% in 4Q12, equaling the lowest rate since 1997 set in 1Q12. As seen in the chart below, Axiometrics is forecasting a steady improvement in the homeownership rate as the economy and prices steadily improve. In many markets the peak recovery rate will remain well below the long-term average. A robust recovery in the SF housing sector helps rather than hurts the apartment market as a healthy SF market boosts the economy, creating more jobs and demand for apartments. Having said that, consumers’ housing preferences will remain tilted more to renting rather than buying through 2017.
The table below shows multifamily and single-family permitting for some of the major MSAs. The pace of MF permitting exceeds single-family permitting in more than half of these markets.