The Impact of New Construction in Multifamily Markets

Quantifying the impact of new or proposed construction is critical in analyzing apartment markets. Although this remains somewhat of an art form, there are several points Aaron & Wright has observed repeatedly.

• •New conventional apartments with high rent levels generally have a limited impact on the projects with the lowest rent. This is especially true in markets in which the new modern product has not been introduced. In these types of markets, new so-called lifestyle renters, many times fill the units. These are people that could have rented houses or the highest quality apartments previously available in the market. The exception to this rule is a market that gets so saturated with new units that it trickles down to all quality levels of existing units.



• •Of late, new products being introduced into small markets that have not seen new units built, tend to be built in phases. Thankfully, developers and lenders appear to be showing some restraint in the amount of new units introduced in small markets.



• •It is difficult at best to quantify the exact demand for proposed units. This is due to the amount of "new" renters that are drawn to modern product. However, the old micro market occupancy analysis is useful. If occupancy of existing units is 90% or less, chances are the market is weak.



• •New modern product can generally achieve rents 10% to 25% higher than a 10-15 year old product. We have seen this proven over and over. Renters pay up for new, modern units.



• •Section 42 Tax Credit projects can many times live harmoniously with conventional units. Careful market analysis must be preformed to determine the number of people in the area, and their income levels. As there are restrictions on the amount of income you can earn to rent at a tax credit project, the overflow can be good for a conventional project located nearby.

The threat of overbuilding is always a concern in the analysis of apartment markets. Careful research must be done of the city/county, level for permit activity, and rumors of such. Interviewing brokers and managers is invaluable in this process.

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