Are Raleigh and Charlotte Apartment Markets Overbuilt?

That dirty word – overbuilt – is starting to creep into discussions about a few apartment markets around the country, including Raleigh and Charlotte:

No one is ready to utter the word “overbuilt” yet, either about Raleigh or other hot construction markets such as Austin, Texas; Charlotte, N.C.; or West Palm Beach, Fla. It’s a matter of degree, as Raleigh’s economic growth just hasn’t been as blistering as investors and developers anticipated, says Greg Willett, vice president of research and analysis for MPF Research. He notes, for example, that over the 12 months, the Triangle region that includes Raleigh has added about 10,600 jobs, which were down from the same period a year ago.

MPF estimates there are 9,626 multifamily properties under construction in Raleigh, which when completed would increase that market’s existing inventory by 7.7 percent. Looked at a different way, construction of multifamily buildings with 40 or more units in Raleigh-Durham for the years 2013 and 2014 combined will be 111.1 percent of net absorption, according to Brad Doremus, a research and economics associate with Reis Inc. Over a five-year period, Raleigh’s new apartment supply is forecasted to add 3.8 percent annually to existing inventory, according to CoStar’s PPR Multifamily.

That 3.8 percent is a hefty increase when compared to history. “To put this into perspective, the PPR54 average for supply growth is 1.2 percent,” says Francis Yuen, PPR’s real estate economist.

On the other hand:

But gauging the temperature of any market’s construction activity can be more art than science. Take Washington D.C., where MPF estimates 20,153 new apartments are under construction. When completed, those apartments would increase D.C.’s existing inventory by 3.8 percent, which Willett concedes would ostensibly signal a market out of balance. But Willett remains convinced that any overbuilding are temporary situations in both Washington and Raleigh because “they’re very attractive long-term investment markets, due to their healthy overall economies and great renter demographics.”

MPF also expects construction to cool in Austin and Charlotte (where new building activity would add 5.5 percent to inventory growth). If their current construction levels accelerate, a correction would be in order. But even if that happens, Willett sees those markets’ long-term outlooks as “very positive.”