Building cranes cluster over central business districts (CBDs) in cities across the country. Many of the most overbuilt submarkets for apartment properties are in downtown areas and secondary business districts. The percentage of vacant apartments is rising sharply in some of these markets, though developers hope strong demand will eventually fill their empty units.
Across the country, developers are building new apartments faster than new renters are signing leases. The percentage of vacant apartments rose 10 basis points to reach 4.4 percent in the fourth quarter, according to New York City-based research firm Reis Inc. “With construction outpacing demand, the national vacancy rate should slowly drift higher over the coming years,” says Ryan Severino, senior economist for Reis. “The national vacancy rate has already bottomed out and is set to keep increasing.”
In 2015, downtown areas topped the list of submarkets where new construction took the biggest bite out of the percentage of occupied apartments. In Indianapolis, for example, the occupancy rate fell more than five percentage points in just a year, according to data firm MPF Research. Strong demand--and curtailed new construction--should help these submarkets recover some of their lost occupancy over the next year.
“In all of these areas, I would expect solid-to-strong demand tailwinds for the foreseeable future--barring any type of recession,” says Jay Parsons, director of analytics and forecasts for MPF.
Since the current building boom began, many multifamily developers set their sites on downtowns and secondary business districts. Downtown Boston and University City in Philadelphia lead the list of places where the percentage of vacant apartments rose the most from 2013 to the third quarter of 2015, according to research firm CoStar Portfolio Strategy.
Developers are busy in many sub-markets where few apartments existed before the latest building boom. A little more than a thousand new apartments delivered from 2013 to the third quarter of 2015 has been enough to sharply increase the apartment inventory in submarkets from Orlando’s Southwest to Downtown Boston, according to CoStar.
A few struggling sub-markets have already begun healing from new construction overhang. Boston’s Downtown/Chinatown submarket has finally seen the end of its building boom, and the vacancy rate should drop 300 basis points over 2016, according to CoStar. In Philadelphia’s University City, vacancies should drop by more than 600 basis points, bringing the market more than halfway to healthy.
Meanwhile, the vacancy rate will keep climbing in 2016 for submarkets like South End in Charlotte and the H Street/NoMa area in Washington D.C., according to CoStar.
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