Is Multifamily Overbuilt?
The multifamily housing sector has been a vital part of the real estate market, offering essential housing options for countless individuals and families. Recently, however, the question of whether we have built too much, too quickly, has emerged.
The multifamily market has experienced significant growth, reaching a record high number of starts for the last two decades in 2022, although starts have since significantly declined. I believe this growth was driven by factors like low interest rates, urbanization and a strong rental market.
However, as cranes dot the horizons and new units come online, I've seen concerns about overbuilding begin to mount.
Indicators Of Potential Overbuilding
Vacancy rates: CBRE forecasted that the vacancy rate for multifamily housing in major markets would see a slight increase in quarter four of 2024, indicating that supply may be surpassing demand. While this is not alarming to me, an uptick from historically low rates could suggest a potential shift in market dynamics.
Rent growth: Some cities are experiencing declines in rent growth despite asking rents rising on a national level, according to a Redfin analysis. This trend creates competitive pressures that benefit tenants in these regions, making it harder for landlords to maintain high occupancy levels.
Construction activity: The pace of new construction remains robust in major markets, but continued development may raise concerns if demand doesn't keep up.
Local Dynamics And Economic Conditions
The multifamily housing market is diverse and varies significantly by region. Some cities are grappling with overbuilding, while others still face housing shortages. Cities like Austin and Denver are experiencing slower rent growth or declines, likely due in part to a surge in construction. In contrast, cities like Indianapolis and New York continue to see growth. In my experience, this can happen due to population growth and job opportunities. Having worked in various markets, I’ve learned that local dynamics are crucial. For instance, while I’ve seen Austin’s rapid growth, I’ve also observed how different factors—like job creation and lifestyle preferences—can dramatically influence demand in neighboring cities.
Economic conditions are crucial for assessing whether the multifamily market is overbuilt. The post-pandemic recovery has been uneven, with some areas seeming to bounce back more quickly than others. States with business-friendly environments are likely to have an easier time attracting new residents and businesses, leading to more robust housing demand. From my experience, I’ve seen how economic resilience can vary widely. In my own investments, I’ve gravitated toward markets that demonstrate strong fundamentals, recognizing that they often weather downturns better than others.
However, higher interest rates have made financing new projects more expensive, which could slow future development. Additionally, the shift toward suburban living for some groups (particularly millennials) likely reduced urban demand in some areas, further complicating the landscape.
I’ve found that identifying properties with unique selling points can be a game-changer. By seeking assets that possess an attractive edge—such as unique amenities, prime locations or strong local demand—investors can mitigate some of these economic challenges and enhance the potential for long-term success.
The pandemic has significantly influenced the multifamily market, initially halting construction for many and later leading to a resumption of projects. Rental dynamics have shifted with the decrease in affordable housing options. While temporary measures like eviction moratoriums likely helped stabilize the market, they didn’t address the underlying supply-demand issues.
Looking Ahead
Despite signs of overbuilding in certain markets, I think the long-term outlook for multifamily housing remains promising. Multifamily properties continue to be attractive investments for my firm, and we are still actively purchasing assets, recognizing that good opportunities are available even amidst market fluctuations. I believe this sector remains a safe investment choice, as it has historically provided stability and resilience for us.
However, caution is advised. Investors and developers should focus on markets with solid fundamentals while being mindful of areas showing signs of oversupply.
While some markets exhibit signs of overbuilding, others still demonstrate strong demand for multifamily housing. Navigating these complexities is essential for maintaining a healthy and sustainable multifamily sector. By staying attuned to market signals, economic trends and demographic shifts, stakeholders can mitigate the risks of overbuilding and seize opportunities in underserved areas, contributing to a vibrant and profitable real estate landscape. I believe that those who adapt quickly and strategically will find success in this evolving landscape.