The Sky is Falling?!?
It seems like everywhere I turn, people are talking about the oversupply of multifamily units that are about to hit the market. From mainstream media outlets to well-known real estate experts, everyone seems to be echoing the same fear. So why am I not panicking?
Cue the back in time music (think Scooby Doo or Wayne’s World). When I was in college, I had to take several statistics classes. One of the first lessons we learned was to always consider the data source. So I did then, and I do today. To cut to the chase, the source everyone is using to predict the oversupply of units is permits pulled. Historically this would be a good metric to use, but today it is not.
The number one reason permits pulled is not a good metric to use is because permits are pulled when one wants to start construction, not as an indicator that construction continued as planned. As development is typically done under floating debt several projects could not continue due to the high cost of the loan. To make matters worse, developers have to forecast, upon purchase, the stabilized long term debt for when the project is completed, as they refinance out of the construction loan. Very few, if any, were able to predict the incredible rise in fixed long term debt resulting in several projects being put on hold and/or forced into a fire sale. The icing on the cake was the rising unexpected costs of materials and labor shortages.
Personally, I have been contacted every single week by sellers and brokers looking to sell development deals that are in all stages of development. I do not believe that my personal experience outweighs national data, however, here is what I do believe: 1) there will be a slight uptick in vacancy due to development of multifamily (and actually Build-to-Rent communities), but I do not suspect it to be as high, nor having as long of an impact as some are saying, 2) you should always consider the source of the data when making predictions as it might not tell the whole story, and 3) remember that data is based on historical information and a lot can change from when the data is aggregated. In this particular situation, a lot has changed since those permits were pulled. It typically takes 12-24 months for large scale development. I don’t know about you, but looking back 12-24 months feels like a lifetime ago.