After several years of little new apartment construction, development activity has ramped up. But industry experts aren’t worried about overbuilding. The number of units under construction is still below historic norms. Plus, most properties coming online today are leasing quickly—with some rental rates well above expectations.

“We’re coming off two exceptionally low years of new deliveries, and we’re still well below the long-term average,” says Michael Ging, Alliance Residential Company’s (ARC) Florida managing director of development. “I don’t see where we’re going to have an oversupply condition.” ARC’s newest property, Broadstone Citrus Village in Tampa, Fla., is 75 percent leased and achieving rents 10 percent above pro forma.

Annual multifamily permits increased by 48.5 percent during April compared to a year ago, representing six consecutive months of annual permitting above 200,000, according to the U.S. Census Bureau. Research firm Axiometrics says new apartment construction will only add 0.7 percent to overall inventory in 2012 and 0.9 percent in 2013.

Those numbers are still below the long-term historical average, according to Axiometrics’ Director of Research Jay Denton. He notes that from 1997 to 2009 new apartment construction grew by an average of 1.5 percent per year. During 2010 and 2011 inventory growth average was 0.5 percent.

“We are seeing new construction heavily concentrated in certain submarkets for many metros, which is typically the urban core,” Denton says. “Those particular submarkets will see a greater percentage of inventory growth the next two years.”

Axiometrics is tracking about 2,500 planned projects totaling more than 700,000 units in 196 markets, but it’s likely that only a small percentage of those projects will be built.

“For all the deals that have been talked about, only a very limited number are actually getting done,” Ging says. “Developers, investors and lenders are being prudent about their investments. They may look at 50 projects and do just one deal.”

New construction has been limited to the urban cores of major markets showing job growth. But Denton says activity is starting to spread beyond the urban core in several markets.

Fortunately, developers are picking submarkets with strong demand drivers. For instance, ARC has several projects underway in submarkets that lack new class-A properties, Ging says.

The lack of new supply has been a boon to apartment owners, enabling them to increase occupancies and push rents.National effective rents increased by 2.5 percent as of April 30, according to Axiometrics. Out of the top 88 markets the firm tracks, 31 have raised rents more than 3 percent since January, and 27 have raised rents more than 5 percent. While San Francisco and San Jose are the strongest, 25 other markets have annual growth rates greater than 5 percent.

It’s clearly a landlord’s market, and that pricing power is evident in the increased occupancy rate for class-C properties. “Renters must decide if they’re willing to take increases,” says Ron Johnsey, Axiometrics’ founder and president. “If not, they have to accept a less expensive floor plan in the same property or move to another property. That’s why we’re seeing higher turnover rates—renters are moving around.”

Class-C properties show the most momentum, achieving the highest growth for both effective rent and occupancy, according to Axiometrics. Effective rental rates were up 2.75 percent for this class, with occupancy at nearly 92 percent.

“The real change from a year ago is the performance of class-C properties,” Denton says. “Rental rate growth at [class]-A and -B properties is slowing, and it’s improving at class-C properties as folks are being pushed from [class]-B-minus to -C properties. We saw the same exact thing in the previous cycle, but it’s a little different today ... by the time the class-A properties [peaked], there was some new supply.”

Despite the weak job market, demand pushed the national occupancy rate to 94.1 percent in April. Denton says the market has not recovered its peak occupancy rate: 95.7 percent in the third quarter of 2000. Even the strongest U.S. markets have yet to match their peak rate over the past 16 years.

“We believe the down cycle ended in 2010, and 2011 was the first year of the up cycle,” says Jeffrey Friedman, CEO of Associated Estates Realty Corp. “We think this time this cycle will be longer, although we don’t know how long. We do expect the strong fundamentals to continue beyond 2014.”

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