An estimated 420,000 new apartments are scheduled to be built nationwide this year, according to a recent report from real estate intelligence company Yardi Matrix. This is the largest number of new apartments built in the U.S. in about 50 years. New York City is leading the way with more than 28,000 new apartments, followed by Miami with about 19,000 and Austin with about 18,000. With so much new product coming on the market, is it time to begin to worry about a glut of supply?
You’ve got to feel for those younger households that want to get into homeownership and simply cannot given the growth in pricing.
Not according to Doug Ressler of Yardi Matrix. The multifamily expert says that the market is still dealing with a shortage of supply and strong demand. Scotsman Guide caught up with Ressler this past October, speaking with him about what he sees in the apartment market going forward and where investors may find the best deals.
How good of an investment is the apartment market right now?
Currently, it offers one of the lowest risk levels in commercial real estate. The multifamily market has high demand and it has the ability to change rental rates to accommodate various conditions. In other words, you are not locked into long-term leases as you are in an office building or a similar investment. So, you’ve got high demand and a shortage of supply, which has really been continuing now for the last 10 years. It doesn’t look like it’s getting any better. So, the rental market right now is prime.
Do you see this continuing into 2023?
Absolutely. You are going to see new supply coming onto the market, which will decelerate it a little bit more, but it’s still very positive. And don’t forget that it takes 36 months or longer to build a large rental building. So, that supply was really created 36 months ago and it’s only now coming out. And even then, we’re seeing that supply is still insufficient to be able to meet the growing demand of another year.
You are not expecting a glut of apartments on the market next year?
No, we don’t see that situation at all. As a matter of fact, the reason why we make that claim is because the occupancy levels continue to remain high, even with the absorption of the new supply being strong. You also have alternative assets, such as single-family rentals, adaptive reuse, conversions and other examples being absorbed. All of those market conditions indicate that demand far exceeds the supply.
Where should commercial real estate investors look for opportunities right now?
I would answer that question based on the investor’s strategy. Are they the type of investor who buys and holds for 10 years, like a REIT? Do they buy and hold for three to five years? Or are they value investors? The answer could be slightly different for each. If you are looking for an area to buy and hold for three to five years that isn’t very competitive, but is still growing, I would follow places such as Albany, New York, and Columbus, Ohio. You have new semiconductor manufacturing facilities by Intel and Micron Technologies being built in these cities.
Another area to look at right now is parts of Florida impacted by the recent hurricane. If you are a housing developer looking to invest in an area, that would be a perfect site because the demand is there. You will also want to look at communities that have electronic vehicle manufacturing operations. They include Oklahoma City, Kansas City and Athens, Georgia. All of those areas are experiencing phenomenal growth.
Based on the Yardi Matrix apartment report, which city’s growth surprised you the most?
The city that somewhat surprised me was Las Vegas because it’s a life and leisure town. However, it’s experiencing significant growth in investment in the last year. Recent climate issues involving water usage haven’t dampened — no pun intended — the development of multifamily activity that is happening in the Vegas area.
What do you expect for rents and the overall market in 2023?
We see a deceleration of rents going forward. They will still be increasing, but they are decelerating very quickly. We think that is because you do have a lot of new supply beginning to introduce competition in various markets. You also have different asset classes, such as single-family rentals, that are offering competition. There is also going to be inflationary and recessionary pain in the housing market in the front end of the year. But I think the economy will gradually rebound as the year progresses. We expect some easing by the Federal Reserve in 2023 and the economy will rebound. So, we believe there will be a slight dip, but then there will be a recovery in 2023 and 2024. ●
