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U.S. Apartment Supply Remains High, No Respite in Near Term

The U.S. apartment supply remains elevated, with fourth-quarter 2017 projected to be the peak period for deliveries. However, delays resulting from labor shortage and escalating costs could push the peak season to first-quarter 2018, as expected completion dates of a number of projects are changing to early 2018 from late 2017.

Per the apartment pipeline data from Axiometrics, a RealPage Inc. RP company, the Houston market is likely to experience a significant decline in new units in 2018, while Dallas, Atlanta, Denver and Austin markets are anticipated to see a moderation in supply. However, the Washington, DC and Los Angeles markets are likely to witness upswing in construction, while new units in New York and Seattle markets are expected to hover near the 2017 levels.

This could cast a pall on residential REIT stocks like AvalonBay Communities, Inc. AVB, Equity Residential EQR and Essex Property Trust Inc. ESS.

Notably, the delay in deliveries has been quite evident in the last few quarters. In fact, per a recent report from Axiometrics, 103,861 new units are marked for delivery in the third quarter, while 117,866 new units are projected to be up in the market in the fourth quarter, according to the survey as of Aug 21. This is in contrast to the data as of May 22, which estimated delivery of 112,856 units in the third quarter and 109,333 in the fourth.

The figures clearly illustrate a decrease of around 9,000 units in the third-quarter schedule, thanks to the delays, and an addition of around 8,500 units to the fourth-quarter roster. The third- and fourth-quarter new unit numbers are also higher than the projections in the first of the year, when they were estimated to be 73,748 in the third quarter and 65,688 in the fourth quarter.

Moreover, data as of Aug 21 suggests expected deliveries of around 381,237 new units for full-year 2017, reflecting a decline of about 13,300 units from the May 22 projections. This reveals a shift of deliveries to 2018. Along with new construction starts, identified supply for 2018 climbed and has now reached 281,139 units. Although the figure is below the anticipated volume of 2017, it is fast reaching the 2016 aggregate, and has exceeded the 2015 and 2014 tallies.

Elevated supply has already affected the performance of residential REITs over the last few quarters. The anticipation of a stressed environment in the near term is also likely to affect their ability to command more rents and concession levels. Further, with some of the residential REITs’ development deliveries running behind schedule amid a delay in construction activities, lease-up net operating income is expected to be adversely affected in the near term.

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