Betty Xiong: Why New Apartment Projects Still Make Sense

Wednesday, December 30, 2015

Why New Apartment Projects Still Make Sense

It’s not too late to build. New apartment communities that open their doors in 2017 will probably still enjoy a strong U.S. apartment market—despite a slightly higher vacancy rate and slower rent growth.

“Even in 2017, apartments are going to look pretty strong,” says Michael Steinberg, senior associate of research and economics with New York City-based research firm Reis Inc.

Apartment developers have been very busy in 2015. They are likely to open even more new apartments in 2016. The number of apartments available will finally grow decisively faster than the number of people looking for apartments, pushing vacancy rates higher and rent growth down, experts says. But vacancy rates are now so low they are likely to remain historically low in 2017, even after creeping upward. What’s more, rents will likely keep growing, even if not as quickly as they did this year.

“We are coming off [a] historically very strong performance,” says Steinberg.

Construction boom

Developers will open more than 228,000 new apartments in 2016 and another 178,000 in 2017 in the top 54 apartment markets, according to research by CoStar Portfolio Strategy. In comparison, during construction booms of the past, like the one in 2001, developers barely finished more than 150,000 apartments.

Demand for new units should remain strong, but not quite strong enough to keep the vacancy rate at its historic low.

“You could work a good horse to death,” says Hans Nordby, managing director with CoStar. The average vacancy rate will rise to the mid-4-percent range by the end of 2017, CoStar researchers project.

You can view entire article in National Real Estate Investor here.