Multifamily Permits in November Marks Thirteen Consecutive Months Of Over 200,000 Units
The U.S. Census Bureau posted its November residential permitting numbers by metropolitan statistical area (MSA) on Friday, December 28. Privately-owned housing units authorized by building permit in November, measured on a seasonally adjusted annual rate (SAAR), were 899,000. This was an increase of 3.6% from the revised October rate of 868,000 and was 26.8% above the November 2011 estimate of 709,000. During November 2012, annual multifamily (MF) permits increased by 46% at the national level from the comparable period a year ago. With the November MF permit number at 261,232, annual MF permitting has now been above 200,000 units for 13 consecutive months. Even with moderating apartment market fundamentals in November 2012, MF permitting growth is being driven by the expectations of developers and investors for a strong apartment market over the next two years. As these permits are turned into completions by mid-to-late 2013, completions will still remain slightly below the long-term historical average for the U.S. and most MSAs.
While still healthy, apartment market fundamentals have moderated primarily due to seasonality. Nationally, annual effective rent growth in November stood at 3.65% with year-to-date rent growth through November at 3.96%. Occupancy inched down a bit from 94.42% in October to 94.26% in November. The sequential growth in occupancy the past few months outperformed the comparable months from 2011 by about 60 bps. At the national level, new supply grew by 0.6% during 3Q12, still well below the long-term average of 1.3%. During 2013, based on Axiometrics’ revised 3Q12 forecast, occupancy is expected to reach 95.2% while effective rents are expected to grow by 3.8%. Deliveries of new supply are estimated to reach historical levels for most MSAs by the latter half of 2014.
The top ten MSAs for MF permitting for the trailing twelve months ending November 2012 are: Houston (11,192 units); New York (13,664 units); Dallas (12,574 units); Austin (10,242 units); Los Angeles (8,582 units); Washington, DC (8,415 units); Seattle (8,309 units); Denver (6,799 units); Raleigh (5,919 units); and Minneapolis (5,067 units). The bulk of the supply is being delivered into the urban core of these markets, although construction is starting to spread to the suburbs of some of these MSAs now. Some of the top MF permitting places on a trailing twelve-month basis through November 2012 are: City of Houston (9,263 units); City of Austin (6,961 units); City of Seattle (6,507 units); City of Los Angeles (5,744 units); Mecklenburg Co., Charlotte (4,349 units); City of Denver (4,203 units); and City of Washington, DC (3,660 units).
For Some Markets, Impact of Current Pace of Multifamily Permitting on Occupancy and Rent May Start to Show by Late 2013
For the U.S. over the trailing 12 months ending in November 2012, MF permitting was up 46% (82,248 units) to 261,232 units while single-family (SF) permitting was up by 20.9% (87,540 units) to 506,839 units (figures are over the comparable period a year ago, not seasonally adjusted (NSA) basis). The long-term annual-average for MF permitting is about 290,515 units, with the peak occurring in 2005 at 389,300 units and the trough in 2009 at 121,125 units. November MF permits are about 116% higher than the trough of 2009; however, the current level is still about 33% below the peak and 10% below the long-term annual average. MF permits are expected to catch up to the historical average by the middle of 2013.
Privately-owned housing starts in November measured 861,000 (SAAR), down 3.0% from the revised October rate of 888,000 but 21.6% above the November 2011 rate of 708,000. November 2012 annual MF starts increased by 19.2% at the national level from the comparable period a year ago. With MF starts in November measuring 285,000, every month in 2012 has had MF starts above 200,000 except January (193,000) and May (178,000). The slower growth of 1.4% in MF starts from October to November is probably attributable to seasonality but the pace of start remains healthy.
In the markets that led the early apartment market recovery with robust growth, new supply is expected to pass the long-term historical average during 2013. On the other hand, those markets that went through a greater housing boom and bust during the last cycle are expecting new supply growth below their historical growth rates during 2013. Even though apartment market fundamentals are strengthening in these heavily hit housing markets, they have not grown enough to trigger a large increase of new supply. Axiometrics expects the impact of new supply to start affecting most markets by the second half of 2014. The graph below shows impact of new supply on occupancy and rent growth by market. Markets with current robust occupancy and rent growth will be impacted the most by the surge of new supply during the outlook period through 2017.
The November 2012 labor market data was above expectation, as the private sector added 147,000 jobs. For the U.S., annual job growth (NSA) was 1.76% and 1.931 million jobs or 146,000 jobs per month in November (p) 2012, compared to 1.86% and 2.011 million jobs or 178,000 jobs per month in November 2011. See Table 1 below for the results for some major markets. The unemployment rate decreased slightly from 7.9% in October to 7.7% in November. There was a downward revision to September job growth, from 148,000 to 132,000, as well as to October job growth, from 171,000 to 138,000.
Because of above expectation job growth in November 2012, the job growth to MF permitting ratio for the U.S. remains high at 10.6 as compared to a ratio of 12.7 during November 2011. The ratio is based upon current period job growth (November 2012) divided by MF units permitted a year ago (trailing 12 months ending November 2011). The more jobs created per MF unit delivered, the healthier effective rent growth should be. The long-term average ratio when job growth is positive is 5.0. Today, the ratio is slightly more than two times that level. Table 1 below shows jobs to permit ratios for selected metros. Though still healthy, ratios for most markets are trending downward during 2013 due to increase in permits.
According to the National Association of Realtors (NAR), existing home sales for all housing types in November were up 5.9% from October and remained healthy at a 5.04 million-unit annual pace. November home prices for all housing types were up 10.1% from a year ago to $180,600. According to NAR, single-family home sales rose 5.5% to a seasonally adjusted annual rate of 4.440 million in November from 4.210 million in October, and are 12.4% above the 3.950 million-unit level in November 2011. The median existing single-family home price was also $180,600 in November, which is 10.1% higher than last year, according to NAR. Robust recovery in the single-family housing sector helps rather than hurts the apartment market industry as the healthy single-family market boosts the economy. And the substitution effects between the sectors get back to the normalization during the healthy economic times.
Table 2 below shows permitting trends by MSA. The MSA monthly permits paused slightly during May 2012 but are back on track again. While skeptical of these permits turning into starts due to the weak job market making the financing of projects more difficult, developers and investors are still finding ways to get projects financed. However, if the labor market slows down during 2013 and investor confidence starts to fade due to macroeconomic issues, underwriting may tighten up even more in the short run. Also, since all MSAs are emerging from virtually no permitting activity during 2011, the growth rate shows a large percentage increase.
MF Permitting Trend at November 2012