Is Apartment Supply Heading to Where Households Are Forming?
What do household formation and apartment supply have in common? MPF Research looked at the relationship between total household growth and apartment supply growth among the top 50 U.S. metros, since the recession. Overall, we found that there is a linear relationship between the two. But by region, clear differences emerge, especially when viewed in light of employment growth over the same time period.
The chart below illustrates the relationships between employment growth, household formation and apartment inventory growth from 3rd quarter 2009 through 3rd quarter 2014. Metro-level employment growth, represented by the size of the bubbles in the chart, was measured on a proportional basis using data from the Bureau of Labor Statistics. Household formation data was gathered from Moody’s Analytics, and MPF Research tracked apartment inventory growth.
The chart shows that the South and West region metros overall have led for household growth, employment growth and apartment inventory growth over the past five years, while the Midwest and Northeast metros have generally lagged for each metric. But within the regions themselves, metro-level performances varied – sometimes widely.
In terms of household growth, apartment inventory growth and job creation, this region of the U.S. saw the largest growth rates in the five years following the recession. The generally solid rates among all three variables at the metro level seem to alleviate some concern that many of the South region metros could face the possibility of becoming oversupplied with apartments. On a metro level, there were a few standout performers with household and apartment supply growth greater than 10%. Markets like Charlotte, San Antonio, Raleigh and Austin each saw double-digit growth, while boasting some of the biggest employment growth in the country. The Texas metros of Fort Worth and Houston were interesting because household expansion significantly outpaced apartment growth. Low single-family inventory and high apartment occupancy suggests that these metros could absorb more apartment supply. Meanwhile, slow-growth markets like Virginia Beach and Tampa landed on the opposite end of the spectrum. As a percentage, apartment supply has significantly outpaced household growth here, which raises a caution flag for future development in these areas.
Like the South, the West region generally saw solid growth in households, employment and apartment inventory since the recovery. Not surprisingly, Seattle and Denver were both top performers. Based on household and employment growth in recent years, Denver is best positioned to absorb new apartment supply. Phoenix saw more household formation than apartment inventory growth over the last five years. Since the metro was a bubble market before the recession, the higher household growth appears to suggest that it is burning off the excess housing supply from the last cycle. On the other hand, San Francisco and San Jose rank #2 and #3 in the country in terms of proportional jobs growth since the recession. Yet even with huge employment growth, household growth is still constrained by limited availability of apartment supply.
While the Midwest has not seen the employment surge of the West and South region markets, household and apartment growth have held steady. Indianapolis, Minneapolis/St. Paul and Columbus have been top performers regionally and have boasted consistently low unemployment. Employment gains in those metros have led to average growth of 6% to 7% in households and apartment stock since the recession. Household and apartment expansion in Kansas City has largely been in equilibrium, but interestingly, the metro has seen only modest job gains. On the other end of the spectrum, Detroit and Cleveland were the country’s laggards. Household formation actually declined in these two metros while apartment supply levels have generally remained the same.
Northeast metros are generally more mature, higher-priced apartment markets. Since the recession ended, this region has seen minimal household growth, with Boston being the exception. Boston, like New York, has seen relatively strong workforce expansion since the recession. But unlike New York, developers have continued building in Boston. Most other Northeast metros have seen only mild inventory expansion. Meanwhile, Hartford and Providence saw little-to-no growth by either count.