Monday, August 3, 2020

Apartment Construction Starts Slowed Nationwide, but Some Southern Cities Bucked the Trend

By David Kahn and Sam Tenenbaum
CoStar Analytics

The onset of the coronavirus pandemic caused multifamily owners, lenders and developers to take a pause in the second quarter of 2020 as uncertainty led to firms taking stock of their own portfolios rather than looking to add to them with either new construction or acquisitions.

It’s been well documented that sales volume, both in multifamily and the other commercial property types, fell off a cliff in the second quarter of this year. But investment through sales only tells part of the story. Analyzing the trends in construction starts throughout the country can help paint a fuller picture because development often poses greater risk than acquiring an existing asset.

Perhaps most important, construction starts indicate sentiment about the future – investors won’t break ground on a new project if they don’t feel that demand will be sufficient in the six to eight quarters following the groundbreaking, when the project is completed and begins to lease up. Therefore, looking at which cities saw the largest and smallest drop-offs in apartment groundbreakings in the second quarter may serve as an early signal for how confident multifamily owners, lenders and developers are in a given city, relative to the nation as a whole.

CoStar Market Analytics looked at which cities saw the largest and smallest drop-offs in groundbreakings compared to its prior five-year trailing quarterly average. Using a five-year quarterly average is advantageous for one key reason: Quarter-over-quarter or even year-over-year groundbreaking figures are exceptionally volatile, even on a metro level. Additionally, the analysis included only markets that broke ground on at least 2,000 units in 2019. This data set shows that apartment construction was down almost 50% from its five-year average nationally.

Plenty of cities saw no properties break ground in the second quarter, including Las Vegas, Nevada; Palm Beach, Florida; and Charleston, South Carolina. Those cities all rely heavily on tourism, a factor that may have temporarily spooked investors and dissuaded developers during the height of the pandemic last quarter.

In terms of markets that did see units break ground, the biggest drop off from the five-year trailing average was Fort Lauderdale, Florida. This makes sense, considering the city’s tourism-dependent economy and typically robust multifamily construction pipeline. Furthermore, Fort Lauderdale delivered nearly 3,000 units in the second quarter alone, representing more than 2% of its existing inventory opening in a single quarter.

Other large drop-offs were seen in New York and Los Angeles, the two largest metropolitan areas in the country and two locales typically viewed as safer from an institutional capital perspective. Other slower-growth, legacy cities including Philadelphia, Chicago and Boston saw drastic drop-offs in construction starts last quarter.

Austin, Texas, with its typically robust construction pipeline, saw groundbreaking activity slow in the second quarter as well. That’s largely the result of a high historical average, rather than a drop in the market, as roughly 750 units still broke ground, compared to a more than 2,500-unit historical average for the market.
Only a handful of metropolitan areas saw an uptick in groundbreakings in the second quarter compared to their five-year trailing quarterly average. Three of the fastest-growing Sun Belt markets saw an increase in new construction starts in the second quarter of 2020. Raleigh, North Carolina; San Antonio, Texas; and Nashville, Tennessee, all saw more groundbreakings than respective five-year quarterly averages, with Raleigh nearly doubling its typical quarterly figure.

All three of those cities have seen explosive demographic growth over the past decade, and many developers and owners feel confident that those long-term trends will outweigh any near-term coronavirus concerns.

Other Sun Belt cities saw slowdowns in groundbreakings last quarter, but not quite to the extent as the rest of the country. Construction starts in Atlanta, Houston, Phoenix, Dallas-Fort Worth and Charlotte all held up relatively well compared to recent history. In fact, Dallas-Fort Worth led the country in terms of the nominal number of units breaking ground in the second quarter, with about 4,500. And even tourism-dependent Orlando, a city with an already robust pipeline and falling rents, saw a shallower drop-off in groundbreakings compared to the national benchmark.

Aside from tourism-dependent Orlando, these Sun Belt locales have all performed better than the nation in terms of job losses since the onset of the pandemic. And long-term demographic growth throughout the region continues to boost developer confidence in many traditionally fast-growing southern cities. However, with cases rising throughout the country, and especially in the south, future construction activity will likely be tied to the relative economic recoveries of these cities over the next few months.

Many of the projects that began construction in the second quarter will deliver in the second half of 2021 or the first half of 2022. If the economy does not return to pre-COVID employment levels by then, those projects could face a more difficult leasing environment.

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