Rooms to go: Expect to see less apartment construction in the coming months

The Dallas News - Steve Brown - 12 January 2017

ORLANDO, Fla. — Almost 50,000 apartments are being built in North Texas.

And nationwide, developers got permits to start an estimated 383,000 multifamily housing units in 2016.

Still, after a half-dozen years of rising construction, the apartment building binge shows signs of flattening in 2017, top housing economists say.

"We are seeing a leveling off of production," said Robert Denk, a forecaster for the National Association of Home Builders. "I think we are pretty much done."

Multifamily home starts — 90 percent of which are apartments — dipped by a hair in 2016, according to the Washington, D.C.-based builders trade association.

And the forecast for 2017 and 2018 is for flat to slightly declining apartment starts.

"We have seen a very strong recovery in the multifamily sector," Denk said at the builders' annual convention this week in Florida. "The nationwide production is above what we think is sustainable.

"All of the evidence points to a stabilization in the multifamily sector."

Apartment construction around the country remains very high — more than three times the starts the industry saw at the worst of the recession in 2009.

"We've been averaging almost 400,000 starts in 2016," Denk said. "We think that's not quite sustainable.

"Things are probably going to drift down. We think production will be between 350,000 and 375,000 units annually, and that is probably more sustainable."

Texas has been the top U.S. apartment building market the past few years, and D-FW and Houston have led other major markets.

While apartment leasing and occupancy in North Texas are at record levels, local analysts wouldn't be surprised if there were fewer project starts this year.

"Permits trailed off a little in the last half of 2016, suggesting the starts volume soon will ease to some degree too," said Greg Willett, top economist with Richardson-based MPF Research. "Capital sources, especially commercial banks, are getting more selective on individual deal selection.

"And in general, it's just tougher to get new projects going."

Willett said the local apartment building cycle is in its eighth year.

"That means costs have been run up a lot, and desirable sites are tough to find," he said.

But don't expect all the construction cranes to vanish overnight.

"North Texas is still the country's most active building hot spot by a huge margin," Willett said. "We can slow apartment construction sharply and still have new supply coming on stream at levels at or above historical norms."

Almost 30,000 apartments are set to open in the D-FW area in 2017, according to MPF Research.

Builders' association economists predict that the cities that have had the biggest run-up in apartment building will see some of the most substantial declines in the coming years.

Texas multifamily construction in 2016 was about 160 percent of what is considered an average production year, builders say.

And the D-FW area is on its list of the 20 U.S. cities most likely to see a significant drop in multifamily starts. Austin and Houston are on that list, too.

"Our industry's production will trail off," said Steve Lawson, a top officer in the builders' multifamily council. "We've been producing record numbers of market rate apartments.

"The fundamentals are still quite good," he said. "But I do feel we are going to see a cooling down."

Lawson said rising construction costs, higher interest rates on development loans and labor shortages are hurting apartment builders.

"The incoming administration's immigration policy is likely to be inflationary for the labor market as well," he said.

Builders in many parts of the country — particularly in Texas — have relied heavily on immigrant labor.