Nearly a year into the coronavirus pandemic, it’s clear that apartment developers, investors and lenders remain cautious despite an improving economic outlook and a multifamily sector that is on the road to recovery.
Roughly 565,000 apartments are under construction, down from the more than 700,000 units that were underway in the first quarter of 2020. This decline in construction activity is widespread. Of the largest 54 metropolitan areas in the country, 44 have fewer units underway now than they did at this point last year.
While the nation’s construction pipeline is emptying out, some cities have seen a more drastic decline in the amount of construction than others.
Perhaps surprisingly, some of the fastest growing areas in the country have seen the steepest drops in construction activity over the past year. Major Texas markets stand out for their respective declines. Houston construction is down roughly 11,000 units compared to the first quarter of 2020, while Dallas-Fort Worth and Austin are both down considerably as well. Construction activity in other Sun Belt cities, such as Atlanta, Miami and Fort Lauderdale, is also much slower than last year.
This makes sense in Houston and Austin, where rents have struggled to recover from pre-COVID levels and recent supply waves have kept vacancies among the highest in the country. Dallas-Fort Worth and Atlanta have held up better, buoyed by consistent job gains that led to some of the best absorption in the country in 2020.
However, it’s important to keep in context that construction in all these areas is down from record or near-record levels. Despite the largest declines in under-construction stock over the past year, Dallas-Fort Worth still ranks third in inventory underway, while Houston ranks seventh and Austin ranks ninth.
Other cities such as Miami and Fort Lauderdale in Florida, as well as Boston and Chicago, are coming off significant supply bumps over the past few years, and it’s likely that construction activity in those areas would have slowed this year, pandemic or not, due to increased developer caution following major supply waves.
Western cities dominate the top of the list for markets seeing an increase in construction activity over the past year. Places such as San Diego and Orange County in Southern California are notoriously difficult to build in and are considered perpetually underbuilt areas. So, the pandemic probably didn’t do much to dissuade projects in the late planning stages from getting off the ground.
With some projects in San Diego and Orange County taking as long as a decade to get through permitting and in the ground, developers are probably less concerned with market fluctuations than in other, more construction-friendly cities. And although both markets were hit hard by the pandemic initially, they are both far outperforming peer West Coast markets in terms of rent growth.
Perhaps unsurprisingly, fast-growing Phoenix has seen an increase in construction over the past year. With the market’s robust performance in 2020, and with rent growth topping 6.5% over the past year, the market is well-positioned to absorb the new construction.
Sacramento is also a leader, but the increase of about 850 apartments since this time last year brings the region’s total units underway to only about 3,000, or 2.4% of inventory. That is still below the national average on a percentage basis.
In Nashville, Tennessee, where Amazon, AllianceBernstein and others are establishing major hubs, developers remain confident despite rents that are down on a year-over-year basis. The Music City’s construction pipeline is essentially unchanged compared to early 2020, and the region now ranks as the top metropolitan area in the country for construction as a percent of inventory, with nearly 10% of its stock under construction.
Areas where the number of under-construction units are up year over year have generally posted stronger rent growth than cities with sizable drops in units underway. Average annual rent growth for the 10 cities where construction has increased over the past year is above 2%, while rents in the 10 cities with the largest declines are essentially flat year over year.
Of course, there are some notable outliers. Atlanta’s decrease in construction activity corresponds with annual rent growth of roughly 5%, one of the best marks in the country. Construction activity is up slightly in Washington, D.C., despite rents falling nearly 4% year over year.
Other surprises are California’s Inland Empire and San Francisco, two areas that have diverged considerably in terms of rent and demand performance amid the pandemic. Despite annual rent growth above 9%, construction activity in the Inland Empire is down about 1,000 units compared to the first quarter of 2020. Meanwhile, construction is down only 1,600 units in San Francisco, while rents are down almost 12% year over year.
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