July 17, 2018
- Multifamily under-construction totals have hovered near 600,000 units for the past two years.
- Although leveling off, current multifamily construction-start levels are above the average monthly rate of 32,900 units since early 2017.
- Annual absorption of more than 230,000 units will be needed to reach supply/demand equilibrium by 2020.
- Robust multifamily demand is expected to absorb much of the new supply from the current pipeline.
The U.S. multifamily industry cannot yet breathe a sigh of relief on the development front, as both the construction pipeline and starts totals remain stubbornly high, according to the latest data from CBRE Econometric Advisors (CBRE EA) and Dodge Data & Analytics.
The multifamily market is poised to experience high levels of deliveries over the next three years, based on these new statistics. Even with demand expected to remain robust over the near term, the U.S. multifamily market will continue to face moderate supply-demand imbalance.
Under Construction Picture
The good news from a market-balance perspective is that the May under-construction total provides a hint that multifamily development has begun to subside. CBRE EA reported 579,300 multifamily units under construction in the U.S. in May. While the total is still very high, it is down 5.1% from the prior month—the largest monthly drop since May 2010.
The total number of units under construction has been hovering near 600,000 for the past year and reached what will likely prove to be the peak of the cycle in April at 610,200 units.
One reason for the high total is that the development process today is longer than in prior cycles (due to the switch from predominantly garden product to mid-rise and high-rise communities) and from a few years ago (due to labor shortages and other factors).
While there’s still a large volume of product scheduled for delivery over the next two to three years, the near-term outlook for multifamily demand remains very healthy. Yet the industry will need to absorb more than 230,000 new units a year (a rough estimate based on a 2.5-year delivery period for the current under-construction total) to reach supply/demand equilibrium.
CBRE EA reports that construction starts in May totaled 35,300 units, which is well under the cyclical peak of 48,800 units in March 2017. The May total also reflected a 4.9% drop from April. While lower in May, construction starts (generally defined as projects that are within 60 days of breaking ground) are still relatively high and exceed the two-year average of 32,900 units.