Supply and Demand Sign

We all know that job growth drives demand for apartments, and we all know that 2014 was an exceptional year for the apartment market. So, one might ask what kind of job gains would be necessary to maintain the supply/demand ration found this year.

Axiometrics calculates its Supply/Demand ratios by dividing current period job growth (November 2014) divided by multifamily units permitted a year ago (trailing 12 months ending November 2013).

One-year lagged permits are a good proxy for multifamily supply, because the U.S. Census Bureau estimates completion time for multifamily projects with five or more units to be 11.9 months. Higher ratios indicate that job gains are outpacing new multifamily units (as it should) and that opportunities for development might exist in markets with solid job gains and little new supply. In addition, the more jobs created per multifamily unit delivered, the healthier effective rent growth should be.

The long-term average ratio for the U.S. when job growth is positive is 5.0. The current ratio is 8.7.

The table below depicts the top 25 Metropolitan Statistical Areas or Metropolitan Divisions among Axiometrics’ Top 50 markets with the most apartments, ranked by annual effective rent growth for the fourth quarter of 2014, according to Axio’s fourth-quarter early release numbers. The table also includes annual job gain (in thousands) through November 2014, annual multifamily permits through November 2013 and the calculation of the demand/supply ratio.

As seen in the table, some of the highest rent growth is occurring in markets with high demand/supply ratios, such as Oakland, Sacramento, Fort Lauderdale, Phoenix and Orlando. Each of these exceeded the current national ratio of 8.7 and were close to 6% or higher rent growth. Dallas and Houston were the only markets with supply exceeding 10,000 units, and they have healthy ratios of 6.5 and 7.9, respectively.


What would happen if we took these demand/supply ratios and applied them to the annual total for multifamily permits through November 2014 – the estimated new supply for 2015? Multiplying the current ratio by total 2014 multifamily permits yields an estimate of what job gains would have to be next year to maintain the current demand/supply ratio. This is seen in the following table.


In this hypothetical scenario, most markets appear to have achievable annual job gain levels through November 2015. A few areas of possible concern would be Houston, Phoenix and Las Vegas, as they would have to really ramp up job gains to maintain their current supply/demand ratios.

In actuality, these and other strong-performing markets that have increased supply from 2014 to 2015 will simply have slightly lower ratios, while continuing to generate jobs, absorb new multifamily supply and experience solid effective rent growth.

This article was originally published on Axiometrics and can be found HERE.