News & Opinions
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Will Building Boom End the Party for Apartmen Investors?
Randyl Drummer / CoStar / May 22, 2013
Wave of New Construction Affecting Everything From Rent Concessions to Cap Rates to Where Investors Place Capital
Apartment developers and investors likely can look forward to enjoying another year or two of high occupancy and pricing power in a strengthening economy. But the music may stop by 2015 when the full brunt from the growing wave of new supply is expected to be felt across U.S. markets.
For now, the good times continue to roll. Multifamily pricing continued to post the strongest results of all product types during the first quarter, though there are signs of a deceleration in apartment fundamentals, mainly as a result of growing new supply, according to the latest CoStar Commercial Repeat Sale Indices (CCRSI).
The multifamily index gain of 0.8% in the first quarter was the best of the four major property types – but a notable decline from its quarterly average of 3.2% over the last two years, according to the CCRSI.
The apartment sector’s impressive performance has been driven in part by stronger fundamentals and in part by the free and easy activity of lenders, especially Fannie Mae and Freddie Mac lenders, the government-sponsored enterprises (GSEs) that have provided cheap debt for buyers.
Much of that readily available financing has been used to buy multifamily property. But increasingly developors have jumped at the opportunity to build, especially with the diminished demand for new office and retail space.
“Supply is getting to normal levels and it’s changing the way some markets are behaving,” said Erica Champion, senior real estate economist with CoStar’s Property and Portfolio Research (PPR). “A full recovery is on the books, and after tumbling for nine successive quarters, we expect vacancies to pivot north over the coming year, thanks to the supply wave that’s quickly turned into a tsunami.”