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Thu. Oct 3rd, 2024

The risk of oversupply is decreasing in most multifamily markets

The risk of oversupply is decreasing in most multifamily markets

The risk of oversupply in the multifamily sector nationwide may be easing as demand increases and construction slows. That could signal a recovery in the market, although the situation varies by market, according to a multifamily market analysis by Cushman & Wakefield.

Last year, more than 1 million units were under construction, the most in U.S. history. That wave of new construction, while occupancy rates were falling, has raised the risk of oversupply in several markets. But the multifamily market has seen some of its strongest demand for apartments on record over the past year, at a time when construction is now slowing.

Cushman & Wakefield has seen the multifamily pipeline shrink in nearly all markets, and has seen significant declines in some of the hottest post-pandemic growth epicenters, like Austin and Nashville. Construction in Austin has fallen from nearly 19% of the inventory a year ago to 11% today, while in Nashville it has fallen from 15% to less than 9%.

To determine where markets fall on the oversupply risk curve, the firm examined housing starts relative to demand, using the formula of units built divided by average historical demand over a given period. Using this formula, the firm estimated that six markets had more than five years of supply on the market last year, but there are no markets this year that have more than five years of construction in their pipeline.

Both the Inland Empire and San Jose lead the nation in relative risk of oversupply, as they have just over 3.5 years of construction left, according to the report. That means demand will have to accelerate as those units are delivered to prevent a glut of new supply. However, San Jose and the Inland Empire differ in the analysis, as the Inland Empire’s vacancy rate is higher than it was in 2019, while San Jose’s is lower than it was in 2019.

Markets like Austin and San Antonio are shifting the risk curve higher as vacancies rose slightly amid strong deliveries, according to the report. For those markets, the combination of increased vacancies and deliveries adds an extra year to the recovery, assuming demand holds steady, Cusman & Wakefield said.

The top five markets for oversupply risk are rounded out by Miami, New York and Charlotte. At the lower end of the risk profile, with fewer years to absorb supply, are Minneapolis, Jacksonville, Louisville, Richmond and Orlando.

While some markets still have significant construction pipelines, the surge in demand suggests the worst may be behind us for most markets, Cushman & Wakfield said. Assuming the economy avoids a recession and demand remains steady, the degree of oversupply is likely to abate quickly, leading to improved fundamentals and property values, even in a higher-interest-rate environment, the firm said.

By meerna

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