Monday 19 March 2018

US apartment builds on hold as rent growth slows

US developers in Atlanta, Georgia, are putting plans for apartments on hold as cracks appear in five-year-old construction boom.
US developers in Atlanta, Georgia, are putting plans for apartments on hold as cracks appear in five-year-old construction boom.

Prashant Gopal

US Developers Steven Shores and Marc Pollack have found a way to stand out from the crowd rushing to build apartments in Atlanta, Georgia's ritziest neighborhood: they're putting their 315-unit project in Buckhead on hold.

"We found ourselves wondering if it makes sense now to move forward on a project when four or five others are on the exact same schedule," said Shores, whose company, Pollack Shores Real Estate Group, will wait a year then reassess its plan for the luxury building.

"We are in it for the long term. There's no reason we can't hold off temporarily."

Apartment developers are starting to tread more carefully as cracks appear in the five-year-old boom that sent rents soaring to records across the US. Construction concentrated in fast-growing urban markets has left cities from New York to Denver and San Francisco with a surplus of high-end units. Rent growth has already tapered off in some areas, and lenders are getting more selective about the projects they fund.

Builders went upscale to preserve profits squeezed by rising land and labour costs. Now they'll need to work harder to find renters willing to pay a premium for trendy locations and frills such as rooftop pools and fire pits. About 30pc of the apartment units under construction are in cities, compared with 15pc in the previous decade, according to multifamily-data firm MPF Research.

"Everybody fell in love with these markets and wanted to build, but you can't build forever, it doesn't work that way," said Ryan Severino, chief economist at research firm Reis Inc. "The apartment market is losing steam."

The second quarter was the fifth straight in which construction exceeded net gains in occupancy, according to a report Reis issued last Tuesday. With almost 200,000 units completed over the past 12 months, "2016 is set to challenge records for construction figures, if not break them", the firm said.

Apartment owners are the worst performers among real estate investment trusts this year.

A measure of multifamily landlords has lost 0.3pc, compared with a 12pc gain for the broader Bloomberg REIT index. Equity Residential, the biggest U.S. apartment REIT, cut its revenue forecast when new leases in New York and San Francisco fell short of expectations because of an increase in supply in those cities.

Effective rents in San Francisco, where apartment construction is at a record high, rose 2.6pc in the second quarter after climbing 9.6pc a year earlier, data from Axiometrics Inc. show.

In Manhattan, deal sweeteners such as a free month were included in 13pc of new leases in May, up from 1.6pc a year earlier, according to a report by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.

Smaller cities also are awash in high-end supply. In Denver, one of the nation's most robust economies, rents rose 4pc in the second quarter from a year earlier, down from 11.2pc growth for the same period in 2015, according to Axiometrics. Houston, reeling from the oil slump, will get 27,575 new units this year, more than any other US city.

Effective rents there, up 3.8pc a year ago, dropped 1.4pc in the second quarter.

In Austin, Texas, where technology jobs are driving up wages, 12,130 units will be delivered over the next 12 months, the most since 1985, said Robin Davis, manager of data firm, The 1,124 apartments under construction downtown would expand that area's rental market by about 31pc.

Developer Mike Lynd has shelved a midrise building planned for suburban Austin with 325 units, and a tower of more than 30 stories in Houston.

Lenders have started tightening underwriting, and land costs in Austin have doubled in three years, "choking off the ability to add supply to Austin in a big way", he said.

Average rents downtown, which increased 1.2pc in the first quarter, would have been flat if not for the recent debuts of some of Austin's most expensive buildings, Davis said.

"The number of units coming online is at such a high price tag," she said. "The central core is going to take time to absorb these units."

Federal banking regulators in December urged commercial lenders to be vigilant in monitoring and managing risk.

"Bad loans tend to happen in good times because of competition and the ease of capital liquidity," Richard Taft, deputy comptroller for credit risk at the Office of the Comptroller of the Currency, said.

"It tends to be at this point in the cycle that banks and lenders increase their risk appetite." So far, borrowers have given commercial lenders no reason to panic.

The delinquency rate for bank-held multifamily loans was 0.26 percent in the first quarter, the lowest since 2005, data from the Mortgage Bankers Association show.

(Bloomberg, with assistance from Oshrat Carmiel)

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