Development Pipeline to Slow Down, Apartment Peak Is Coming

2017 has been an active (and quite hectic) year in the real estate industry. The year has been rife with store closures, building booms, and changing rents. Volumes are down, prices are up, but overall investment sales remain stable. In the multifamily sector, analysts predict that there is going to be a peak in 2018. Since a peak may be on the rise, developers are reducing their construction pipelines to help them out in the following year.

Good News for Investors

Investors prefer apartments to other CRE properties because there’s a huge renting population. The demand has and will continue to be great. Additionally, there’s a high occupancy rate, and it is easier to fill vacancies compared to other property types. According to a survey by NREI, 47.3% of investors surveyed plan to buy a multifamily property, while 36.2% plan to hold. The majority of the investors also believe that cap rates will increase next year.

Because occupancy rates and rent growth, for the most part, are stable, investors see growth in the multifamily market. Especially in apartments.

Developers Halt as Deliveries Slow Down

The development pipeline this year is at just over $800 million. Currently, pipeline deliveries have slowed down. Since this sector is expected to peak next year, developers plan to cut back over the next few quarters. Although we are not as nervous as we once were about over-supply, we remain cautious. As always, we want to see a boost in value and not risk overbuilding.

Analysts are predicting that more than 700,000 apartment units will be built over the next three years starting in 2018. Overall, residential housing is expected to boost by 4%, and the market looks stable for now.

Impact of Construction Shortage

Let’s be honest. This past year has been rough when it comes to construction and financing. Construction is maturing, and spending in the multifamily sector might fall by 8% next year. Not only will spending decrease, but construction permits for multifamily properties are also expected to decline next year; however, permits for other sectors such as office, retail, and hospitality are expected to rise by about 2%.

Although construction for the multifamily construction sector has climbed tremendously in the last decade, the number of those employed has not. Why not? Truthfully, there is not as many young people as there once was who desire to work in this field. The population is aging, and interest in construction working has gone down while tech-related fields have gained traction. Also, finding qualified construction workers has become difficult.

Because of this shortage, construction periods of multifamily projects are now longer and more expensive than it once was! Occupancy levels have also dwindled a bit in the last few years, so deliveries must slow down if this peak is coming. However, the sector will remain a love for many investors. Overall, the market looks quite strong and steady despite high levels of construction.