March 25, 2015

Apartment development: you ain't seen nothing yet

Apartment developers have crossed into uncharted territory in terms of new construction, according to new reports from Dupre + Scott Apartment Advisors.

A record 12,000 apartments are set to open this year, and another 11,000 are scheduled to open next year.

All of the units set to open this year — and about 70 percent of those projected to open next year — are under construction.

Patty Dupre and Mike Scott say in their report they are tracking more than 48,000 units that could open by 2019. Some of these projects may not happen, but Dupre and Scott said “developers seem to be finding new sites almost weekly that are not currently in the pipeline, offsetting some or all of the projects that might be delayed or shelved.”

Dupre and Scott are following 115 sites around the region that could accommodate at least 18,000 more units. These sites might be for sale, or development plans haven't been made public yet.

Rents rose 7.4 percent in the last 12 months and 2.6 percent in the past six months.

Dupre and Scott warn against what they call the “skew of the new,” which means the higher rents fetched by new buildings drive up the average. New construction costs more, and rent for new units can be 40 percent higher than for existing units. If you take out the new units, rents rose 5.7 percent over the past year and 1.9 percent in the last six months.

“We're just beginning to see the distortion that new construction will create,” Dupre and Scott said in the report.

Expenses also are starting to rise, according to Dupre and Scott. Last year, apartment expenses rose 6.3 percent.

In the last few years, demand has kept up with supply. Developers opened 8,919 units in the past 12 months, and 8,632 new renter households were formed in the area.

But will demand keep up over the next four years when all these new units open? Dupre and Scott have a simple answer: “Who knows?”

Vacancy rates have continued to fall as developers keep building. According to Dupre and Scott, the vacancy rate excluding just-opened buildings that are still filling up is 3.5 percent, down from 3.8 percent last fall.

Factor in the new units, and the vacancy rate is 4.7 percent. That is unchanged from last fall, a pretty good sign considering developers have opened more than 5,000 new units since then, Dupre and Scott said.