Expectation of Healthy Apartment Rent Growth in 2013 Drives a More Than 50% Increase in Multi-Family Permits in September
The U.S. Census Bureau posted its September residential permitting numbers by metropolitan statistical area (MSA) on Monday, October 29. Privately-owned housing units authorized by building permit in September, measured on a seasonally adjusted annual rate (SAAR), were 894,000. This was an increase of 11.6% from the revised August rate of 801,000, and was 45.1% above the August 2011 estimate of 616,000. During September 2012, annual multifamily (MF) permits increased by 50.4% at the national level from the comparable period a year ago. With the September MF permit number at 247,338, annual MF permitting has now been above 200,000 units for eleven consecutive months. Even with slower than expected job growth and moderating apartment market fundamentals in September 2012, MF permitting growth is being driven by the expectations of developers and investors for a stronger apartment market in the coming year. As these permits are turned into completions by mid-to-late 2013, completions will still remain slightly below the long-term historical average for the U.S. and most MSAs.
A link to the September MF permitting report in Excel is listed under the News & Updates section to the right. Also available is a link to an Excel file detailing the MF permitting trends by month over the past thirteen months for 4,148 permit issuing places.
Due to the structural issues surrounding employment growth, apartment market fundamentals have moderated as compared to 2011 but still remain healthy overall. Nationally, annual effective rent growth in September measured 3.55%, while year-to-date rent growth through September was 4.61%. Occupancy inched up a bit, from 94.50% in August to 94.55% in September. At the national level, new supply grew by 0.6% of the renter housing stock, which is well below long-term average of 1.3%. For the U.S., occupancy and effective rent growth during 2012 is forecast to settle at 94.4% and 3.6%, respectively. During 2013, occupancy is expected to reach 95.3% while effective rents grow by 4.2%. Deliveries of new supply are estimated to reach historical levels for most MSAs by the latter half of 2014.
The top ten MSAs for MF permitting for the trailing twelve months ending September 2012 are: New York (12,641 units), Houston (12,263 units), Dallas (12,191 units), Austin (8,852 units), Los Angeles (8,437 units), Washington, DC (8,018 units), Seattle (7,034 units), Denver (6,038 units), Atlanta (4,390 units), and Charlotte (4,224 units). The bulk of the supply is being delivered into the urban core of these markets, although construction is starting to spread to the suburbs of some of these MSAs now. Some of the top MF permitting places on a trailing twelve-month basis through September 2012 are the City of Houston (8,042 units), City of Dallas (6,720 units), the City of Austin (6,202 units), the City of Los Angeles (5,783 units), Seattle (5,362 units), the City of Washington, DC (3,795 units), and Denver (3,716 units).
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News & Updates
Multifamily Permitting Report – September 2012
Major Market Multifamily Permitting by Permit Issuing Place – September 2012
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Current Pace of Multifamily Permitting May Take Some MSAs Above Long-Term Average Apartment Inventory Growth in 2013
For the U.S. over the trailing twelve months ending in September 2012, MF permitting was up 50.4% (82,847 units) to 247,338 units while single-family (SF) permitting was up by 16.6% (68,738 units) to 483,196 units (figures are over the comparable period a year ago, not seasonally adjusted (NSA) basis). The long-term annual-average for MF permitting is about 290,515 units, with the peak occurring in 2005 at 389,300 units and the trough in 2009 at 121,125 units. September MF permits are about 51% higher than the trough of 2009, however, the current level is still about 57% below the peak and 17% below the long-term annual-average. MF permits are expected to catch up to the historical average by the middle of 2013.
Privately-owned housing starts in September measured 872,000 (SAAR), up 15% from the revised August rate of 758,000 and 34.8% from the September 2011 rate of 647,000. September 2012 annual MF starts increased by 18.7% at the national level from the comparable period a year ago. With MF starts in September measuring 260,000, every month in 2012 has had MF starts above 200,000 except January (193,000) and May (178,000). The 25% increase in MF starts from August to September is probably attributable to a slightly slower start rate during August as well as generally healthy apartment market conditions.
In the markets that led the early apartment market recovery with robust growth, new supply is expected to pass the long-term historical average during 2013. On the other hand, those markets that went through a greater housing boom and bust during the last cycle are experiencing new supply growth below their historical growth rates. Even though apartment market fundamentals are strengthening in these heavy hit housing markets, they have not grown enough to trigger a large increase of new supply.
U.S. Metros 2013 Inventory Growth Compared to LTA
Labor market data for September 2012 was anemic, as the private sector only added 104,000 jobs. For the U.S., annual job growth (not seasonally adjusted) was 1.4% and 1.822 million jobs or 114,000 jobs per month in September (p) 2012, compared to 1.4% and 1.784 million jobs or 202,000 jobs per month in September 2011. See Table 1: MF Permits and Job Growth below for the results from some major markets. The unemployment rate measured 7.8% in September, dropping from 8.1% in August. There was an upward revision to July’s job gains, from 141,000 to 181,000, as well as to August’s, from 96,000 to 142,000.
Since it began in March of 2010, the U.S. economic recovery has been spotty and moving at a slower pace than in previous recessions due to the heavy impact on the housing and financial employment sectors. The problems surrounding the labor market have been compounded due to U.S. fiscal issues, government regulations, and “taxmageddon.” More immediately, the looming deadline for the U.S. to fall off the “fiscal cliff” is approaching quickly. The terms of the Budget Control Act of 2011 are scheduled to take effect by the end of 2012, ending last year’s temporary payroll tax reductions and the Bush tax cuts. Additionally, Congress included a provision in the debt-ceiling legislation last year that stipulated an automatic series of budget cuts (the sequester) over nine years that would total $1.2 trillion if the super committee failed to reach agreement. The super committee failed. There is very little probability (about 20%) of the U.S. falling off the fiscal cliff, but if it does happen, the U.S. could lose about 3.0 million jobs and the economy could go into a recession in early 2013. The effects on the U.S. apartment market would be widespread due to massive job losses, with apartment properties in the lease up phase affected the most.
Effects of Fiscal Cliff to U.S. Economy
Despite sluggish job growth in September 2012, the job growth to MF permitting ratio for the U.S. remains high at 11.1 as compared to a ratio of 13.7 during September 2011. The ratio is based upon current period job growth (September 2012) divided by MF units permitted a year ago (trailing twelve months ending September 2011). The more jobs created per MF unit delivered, the healthier effective rent growth should be. The long-term average ratio when job growth is positive is 5.0. Today, the ratio is slightly more than two times that level. The graph below depicts the job growth to MF permitting ratio for major U.S. MSAs during September 2012.
According to the National Association of Realtors (NAR), existing-home sales in September were down slightly from August but remain healthy at a 4.750 million unit annual pace. September home prices were up 11.3% from a year ago to $183,900.
Table 1 below shows permitting trends by MSA. The MSA monthly permits paused slightly during May but are back on track again. While skeptical of these permits turning into starts because the weak job market makes financing of projects more difficult, developers and investors are still finding ways to get projects financed. However, if the labor market slows down further and investor confidence starts to fade due to macroeconomic issues, underwriting may tighten up even more in the short run. Also, since all MSAs are emerging from virtually no permitting activity during 2011, the growth rate shows a large percentage increase overall.
Multifamily Permits and Job Growth
Of 4,148 permit issuing places, the top 40 places for 5+ permits during September 2012 are shown below.
Monthly MF Permits by Place