Multifamily Permitting, At 268,205 Units, Remained Steady During 2012
The U.S. Census Bureau posted its December residential permitting numbers by metropolitan statistical area (MSA) on Monday, January 28. Privately-owned housing units authorized by building permit in December, measured on a seasonally adjusted annual rate (SAAR), were 903,000. This was an increase of 0.3% from the revised November rate of 900,000 and was 28.8% above the December 2011 estimate of 701,000. During December 2012, annual multifamily (MF) permits increased by 45.8% at the national level from the comparable period a year ago. With the December MF permit number at 268,205 units, annual MF permitting has now been above 200,000 units for 14 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 though the first waves of permits are 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 Raleigh; Washington, DC; Baltimore; Austin; and Nashville, where new supply will pass the average historical rate this year.
While still healthy, apartment market fundamentals moderated in 2012 compared to 2011. Nationally, annual effective rent growth in 2012 was 3.6%, as compared to 4.2% in 2011. Occupancy inched up a bit from 93.7% in 2011 to 94.3% in 2012. The increase in occupancy in 2012 was primarily due to late recovering markets, which posted occupancy growth while others maintained their already high occupancy rates. U.S. apartment occupancy is forecasted to reach 94.9% in 2013, with effective rent growth reaching 3.6% by the end of 2013. The occupancy forecast is 60 basis points above the 2012 rate whereas rent growth is similar to the 2012 rate.
The top ten MSAs for MF permitting for the trailing twelve months ending December 2012 were: Houston (14,748 units); New York (13,931 units); Dallas (12,548 units); Austin (11,117 units); Seattle (8,488 units); Los Angeles (8,195 units); Washington, DC (8,109 units); Denver (7,923 units); Raleigh (6,355 units); and Minneapolis (5,719 units). The bulk of the supply is being delivered into the urban core of these markets, although construction is now starting to spread to the suburbs of some of these MSAs as the urban core is getting a little too crowded in a few of them. Some of the top MF permitting places on a trailing twelve-month basis through December 2012 were: City of Houston (8,942 units); City of Austin (7,545 units); City of Seattle (6,575 units); City of Dallas (6,028 units); Los Angeles (5,540 units); Mecklenburg Co., Charlotte (4,660 units); City of Denver (4,356 units); and Raleigh (3,549 units).
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After Peaking in 2014, Multifamily New Supply Delivery Is Expected to Decelerate
For the U.S. over the trailing 12 months ending in December 2012, MF permitting was up 45.8% (84,196 units) to 268,205 units, while single-family (SF) permitting was up by 22.6% (94,640 units) to 513,138 units (figures are over the comparable period a year ago, not seasonally adjusted (NSA) basis). Though the current MF permitting is 31% below the peak seen during 2005 and 8% below the long-term average, it is well above the levels seen during the trough of 2009. For some of the metros, the current permitting levels have come very close to the long-term average.
Privately-owned housing starts in December measured 954,000 (SAAR), which was up 12.1% from the revised November rate of 851,000 and 36.9% above the December 2011 rate of 697,000. December 2012 annual MF starts increased by 115.7% to 330,000 units at the national level from the comparable period a year ago of 153,000 units. From November to December 2012, multifamily starts increased by 23.1% or by 62,000 units. With MF starts in December measuring 330,000, every month in 2012 has had MF starts above 200,000 except January (193,000) and May (178,000).
As the graph below shows, Axiometrics forecasts current permits and starts to begin impacting the performance of the apartment market starting 2013 and to continue through 2015. Though fundamentals will decelerate, the impact to occupancy and rent growth will be minimal if the job growth holds up. Even though a fair amount of new supply is expected during 2015 and continuing through 2017, it should moderate as compared to 2014. The reasons for slightly declining new supply are: 1. As job growth decelerates during 2015 so will the market fundamentals, making it harder to underwrite new deals; 2. The impact of continuous new supply growth will weaken market fundamentals further; 3. By definition, developers would like to build, however, due to their experiences from past cycles, they already have a healthy fear of oversupply. If lenders, investors, and developers are rational, a speculative assumption, they should study the market more thoroughly today before committing to a new project. After 2015, modest job growth and declining new supply is expected to reset the market cycle to a growth mode once again.
The graph below compares each MSA’s inventory growth to its long-term average inventory growth. In the MSAs 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 rate averages during 2013. The top five MSAs where 2013 inventory growth is expected to pass the long-term average are: Charleston, Raleigh, Washington, DC, Austin, and Nashville. The MSAs where 2013 inventory growth is forecasted to remain below the long-term historical average are: Las Vegas, Orlando, Phoenix, Jacksonville, and Atlanta. 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. 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.
Despite the uncertainty created by the heated debate over the fiscal cliff, employers added 155,000 jobs in December 2012 bringing the annual jobs created for the month to 1.857 million jobs. Though December job numbers beat the consensus forecast, hiring remained moderate and did little to get the U.S. out of its sluggishness. The revised unemployment rate remained elevated and unchanged during December from the November rate of 7.8%. For 2013, job growth is estimated at 1.6% or 2.1 million jobs, slightly better than the job gain seen during 2012. Monthly job gain is expected to average 153,000 jobs per month during the first half of 2013 but the pace of job creation is forecasted to increase to 202,000 jobs per month during the second half of 2013.
The job growth to MF permitting ratio and job growth to total residential permitting ratio remained high during 2012 for the U.S. at 10.1 and 3.0 respectively. The ratio is based upon current period job growth (4Q2012) divided by MF and total residential units permitted a year ago (trailing 12 months ending 4Q2011). The more jobs created per MF and total residential units delivered, the healthier effective rent growth should be. The long-term average MF and total residential ratios when job growth is positive is 5.0 and 2.0, respectively. Today, both ratios are higher than the long-term average. Though the MF and total residential ratios are expected to remain healthy, they are expected to moderate during 2013 to 7.0 and 2.3, respectively. The correlation between the two ratios to rent growth is nearly 85%, reinforcing Axiometrics’ use of these ratios to forecast effective rent growth at the property level.
According to the National Association of Realtors (NAR), existing home sales for all housing types in December were down 1.0% from November but remained healthy overall at a 4.94 million-unit annual pace. December home prices for all housing types were up 11.5% from a year ago to $180,800. According to NAR, single-family (SF) home sales declined 1.4% to a seasonally adjusted annual rate of 4.350 million in December from 4.410 million in November, but are 11.5% above the 3.900 million-unit level in December 2011. The median existing SF home price was $180,300 in December, which is 10.9% higher than in 2011, according to NAR. 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. Axiometrics is forecasting the continuing recovery of the SF housing market during 2013 and beyond. However, the homeownership rate, as shown in the chart below, took a free fall for most markets during the housing bust. The improvement in the homeownership rate will be gradual with the homeownership rate still well below its peak in many markets. The transition of consumers to renting single-family homes is constraining the improvement in the homeownership rate and reflects consumer’s preference during the current cycle to rent rather than own.
Table 1 below shows permitting trends by MSA. The healthy apartment market fundamentals and dried up new supply during the last three years have made it easier for investors and borrowers to make a case for new apartment construction. However, if the labor market slows down during 2013 and investor confidence starts to fade due to macroeconomic issues, underwriting may tighten up 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.
Of 4,147 permit issuing places, the top 40 places for 5+ permits during December 2012 are shown below.