Drop in Construction Could Lead to Apartment Shortage

The Dallas News

A dramatic decline in U.S. apartment construction could lead to a shortage of rental housing in the years ahead.

This year, developers are expected to start about 87,000 units – less than a third of what they build on average each year. And the outlook for 2011 isn't much better.

"We will be facing a severe shortage of apartments in the next few years, which will increase the cost of housing for consumers," Sharon Dworkin Bell, senior staff vice president of the National Association of Home Builders, said at this week's convention in Las Vegas. "We believe we should have 300,000 starts every year to have a stable market."

That's not likely in the foreseeable future.

"We have a combination of limited supply coming on and increased demand when the economy recovers," Bell said.

Michael Costa, a partner in McFarlane Costa Housing Partners of California, said, "We know that the demand for housing – especially rental housing – is going to be there. Each month we are not able to get our starts going, we fall further and further behind."

At some point, a lack of rental units will take a bite out of consumers' pocketbooks. "We are predicting now we may see upwards of double-digit rent increases," Costa said.

His firm, which typically starts up to 35 rental communities nationwide each year, has just four projects in the works.

The slowdown has been even sharper for developer Jerry Durkin, whose Wood Partners builds rental units across the country, including several recent projects in the Dallas area.

In 2006, Atlanta-based Wood Partners started about 6,500 units.

"We closed one start in 2009 – a 150-unit deal," Durkin said. "I don't know how 2011 ramps up unless capital frees up."

Over the last couple of years, the Dallas-Fort Worth area has been one of the country's top rental housing construction markets. But startups of new Texas apartments have virtually stopped.

More than 11,000 Houston and Austin apartments were under construction in North Texas at the start of 2010, however, and there are lots of new units on the market, so rents have been falling and vacancies increasing.

The same is true in other U.S. markets, which makes apartment analyst Greg Willett of MPF Research skeptical about a shortage.

"To get back to an essentially full occupancy rate of about 95 percent, we've got to absorb about 600,000 apartments nationally and about 30,000 Dallas-Fort Worth apartments," Willett said.

"The builders are overestimating the number of kids in the basement" who will move out of their parents' homes when the economy rebounds, he said.

Dr. James Gaines of the Real Estate Center at Texas A&M University also says a shortage is a ways off.

"An offsetting factor is the number of foreclosures and other distressed properties being bought by investors and turning into rentals," he said.

Dallas apartments analyst Ron Witten predicts apartment markets around the country could be full by 2012, but that doesn't mean building would start right away.

"Developers have to find and entitle sites, then begin construction," he said. "It could easily be 2014 and possibly later before a meaningful number of new apartments are available for residents."