by Shane Henson — January 17, 2014—Over the next three years, U.S. multifamily housing rents are expected to grow by approximately 2.5% per year nationally even as the level of new construction increases, according to a new research report from CBRE, a global commercial real estate services and investment firm.
The report, Is the Bloom off the Multi-Housing Rose?, finds that the pace of new multifamily development in the United States—which has grown significantly since the end of the recession—will level off at approximately 216,000 units per year over the next five years, slightly above historical averages.
“The multihousing sector is only now beginning to fill a supply shortage that has existed following a three-year-long drought in development resulting from the recession,” said Jim Costello, CBRE’s head of Americas Investment Research. “We anticipate that most of the new supply that will come online over the next few years will be absorbed by pent-up demand.”
While the 2.5% forecasted annual rent growth rate is above the pace of inflation, it is more moderate compared to the robust 3.9% annual average growth seen since the recovery began in 2010.
The report, which assesses supply trends, rent levels, construction costs and cap rates for 13 major U.S. markets, finds that current market rents are marginally higher than what developers require to achieve target current returns in the 6% to 7% range. Boston, Southeast Florida, Seattle and Washington, DC, represent the best opportunities for developers, as achievable rent levels are significantly higher than construction costs in these locations. However, the anticipated increase in long-term interest rates could restrict development in markets where there is a small gap between achievable rents and construction costs.
The CBRE report also finds that tougher underwriting standards, higher equity requirements, and greater scrutiny of borrowers by risk-averse financial institutions for construction loans will slow the pace of development and keep supply levels in line with market demand.
“In the aftermath of the global financial crisis, banks are requiring 25% to 30% of a project’s cost to be financed via equity, and are only willing to lend to developers with a proven track record,” noted Peter Donovan, senior managing director of CBRE’s Multi-Housing Group. “This serves as a form of capital rationing that will likely prevent overdevelopment in the coming years.”
