Should multifamily developers, owners start to worry?

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by Dan Rafter

By now, you know the story: Apartment rents across the country, including in the Midwest, continue to rise. At the same time, the demand for new apartments everywhere from Columbus to Indianapolis to downtown Omaha is soaring.

The multifamily sectors remains the top performer of all commercial asset classes. But is there reason for concern? This recent story by the Wall Street Journal suggests that there might be.

The Journal story focuses on the spike in new apartment units in major cities across the country. This rising inventory is causing a slowdown in apartment rents in many of the biggest metropolitan areas in the United States, according to the story.

The Journal reports that the annual rent growth for high-end urban apartments hit its peak of nearly 8 percent at the end of 2011. It has since slowed to just a bit more than 3 percent, according to numbers from MPF Research, a research firm that studies the nation’s apartment market.

The Journal writes that the slowdown in rent growth should only increase in the coming years. That’s because in 25 of the largest U.S. cities, multifamily permits in urban areas had risen 39 percent in 2015 when compared with 2014, according to research by Zelman & Associates.

This increase in new supply might cause the owners of new buildings to offer increased concessions, such as a month or two of free rent to new tenants. At the same time, the owners of existing buildings might lower their monthly rents to compete.

The developers working across the Midwest say that the apartment markets in their cities are still strong. And they’re right: Urban areas in the Midwest are seeing a steady supply of new multifamily projects.

The question that the Journal story raises, though, is a serious one, and it’s one that CRE pros here have been debating: When do cities hit that point at which the supply of new apartments is too high for the demand for rentals? And when does an increase in supply begin hurting the owners of both existing and new apartment projects in the form of sluggish rent growth?

No one knows when we’ll hit that point. But the Journal story suggests that some caution is called for.

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