The U.S. housing market is woefully undersupplied, but multifamily investors are focused on overbuilding in urban core markets. The current multifamily development boom has turned the multifamily market into a sellers’ game, causing investors to start avoiding new product.
This odd juxtaposition of underbuilding and overbuilding has somehow worsened the current housing environment. At a time when more inventory is desperately needed, the threat of overbuilding is pushing multifamily investors towards acquisitions of existing properties over new construction. Investors are focusing their new acquisition in suburban markets to avoid urban overbuilding.
- Multifamily investors are scared that urban core markets are becoming overbuilt
- The threat of overbuilding is causing investors to spend on acquisitions of existing properties rather than new construction
- Garden-style asset increased by 65.9% while high-rise acquisitions decreased by 41.5% in 2017
New research from commercial real estate giant JLL provides a window into the state of the multifamily housing industry.
“Despite the current multifamily building boom, the U.S. housing market as a whole remains undersupplied,” JLL’s research team said in its latest multifamily investment outlook report. “A study released in 2017 from the National Multifamily Housing Council and National Apartment Association highlighted the need for at least 325,000 new units to be constructed every year until 2030 to keep pace with demand. The annual average of newly delivered units over the past decade is a lesser 250,000 units.”
The lack of construction is not for want of capital, Rice said, adding that the multifamily space is flush with capital for both debt and equity from all kinds of investors.
But investors seem to be more willing to spend on acquisitions of existing properties rather than new construction, leading to a scarcity of supply.
That leads to an unfortunate catch-22 for the American housing market: Demand is undeniably present for affordable housing, but the threat of overbuilding, rising cost of construction labor and commodities make that demand fiscally inaccessible and put a chill on multifamily pipelines.
The result is that, as of right now, the multifamily market is a seller’s market.
Because new product has been primarily delivering in urban core markets, those areas are now perceived as overbuilt, and most investors have turned their attention to the suburbs.
“While the supply story has been national in scope, the product that has delivered or is currently under construction has skewed toward urban submarkets. As a consequence of this, and with yields in cities at record lows, investment into urban multifamily assets in 2017 declined significantly,” JLL’s research team notes. “High-rise acquisitions fell by 41.5%. Conversely, capital flocked to the suburbs, purchasing garden-style product at an elevated rate. Garden-style assets represented 65.9% of all multifamily acquisitions, the highest rate during the past ten years.”
View the original article at Housing Wire