CoStar Insights

Coastal Markets Among Most Challenging for Adding New Apartment Supply; Easier in Midwest, South Markets

by Mark Heschmeyer | Jun 29, 2017
Following the release of its findings last week that the U.S. may need millions more apartment units by 2030 if current household formation trends continue unabated, the National Apartment Association (NAA) and National Multifamily Housing Council (NMHC) identified what they see as the hardest and easiest metro areas where new apartment supply can be added. 

The top four most-challenging places to add new apartments are all coastal markets: Honolulu, Boston, Baltimore and Miami. Somewhat surprisingly, Memphis was ranked as the fifth most challenging, according to the research conducted by Hoyt Advisory Services (HAS) and commissioned by the NAA and NMHC. Six California cities were also listed among the markets considered more challenging to construct new apartments. 

The NAA/NMHC report ranked New Orleans as the market most conducive to new apartment development, followed by four Midwest markets: Little Rock, Kansas City, Indianapolis and St. Louis. Other southern markets also fared well, including four in Texas. 

The research, conducted by Dr. Norm Miller, a principal at Hoyt Advisory Services and professor of real estate at the University of San Diego, examined and ranked 50 U.S. metro areas based on several factors, including local regulations and a measure of the amount of land available for multifamily development. 

"For many reasons, building apartments has become costlier and more time-consuming than it needs to be,” said Bob DeWitt, NMHC chairman. "Over the past three decades, not only have hard costs like land and (construction) materials risen sharply, but regulatory barriers to apartment construction have also increased significantly, most notably at the local level." 

DeWitt cited several factors he said contributes obstacles to development, including "outdated zoning laws, unnecessary land use restrictions, arbitrary permitting requirements, inflated parking requirements and environmental site assessments," all of which discourages housing construction and raises the cost of apartments that are built. 

The ranking, titled the Barriers to Apartment Construction Index, scores 50 metro areas along an index that goes up to 19.5 in the most difficult market, down to -5.9 for those considered easiest. While real estate is project specific, the report's authors said any score above the median of 1.8 indicates a market where it is harder to add new apartments compared to other metros based on the same criteria. 

The recent studies sponsored by NMHC and NAA are intended to support their Vision 2030, a set of recommendations the two apartment groups issued calling for all levels of government to lower barriers to development.

"While the number of new apartments built each year has been rising, it hasn’t been enough to meet current demand and make up for any possible shortfall at certain price points in the years following the recession," said NAA Chair Cindy Clare, CPM. "This imbalance between high demand and limited supply options has driven down affordability and reduced housing options for renters. Rents tend to be particularly high in areas with the greatest barriers to new development, such as California, where there’s a significant shortage in available land for building new apartment homes." 

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