Risks as Growing Construction Pipeline Spreads Beyond New York City

Multifamily on a Tear

Few of the large projects that seemed improbable a year ago have advanced enough that shovels have hit dirt. Most are in the planning and permitting phases. For the projects that are furthest along in that process, construction is anticipated to begin in late 2011 or early 2012 at the earliest. Even in New York City, year-over-year construction employment is still down, reflecting the lag between project announcements and activity.

At the national level, as well, an observable increase in planned and proposed projects has yet to make a significant impact on national construction payrolls or spending activity. In terms of permitting, the apartment sector may be furthest along. But office and hotel projects are being announced with surprising frequency as well.

In the second quarter, 37,000 rental apartments units were started, according to the census count. That is the highest tally since the fourth quarter of 2008 and more than double the recession’s low. Nonetheless, the lagging impact of the recession’s construction slowdown is readily apparent in the construction data. While apartment demand is robust, recent construction starts have yet to result in inventory additions. Only 24,000 rental units came online in the second quarter, the smallest number on record.

There is no shortage of apartment development projects to cite as indication of the national supply response to improving fundamentals. Among high-profile projects, Kensington Investment and National Development have reportedly just broken ground on a 27-story, 385-unit apartment building on the edge of Boston’s Chinatown. Less than a month earlier, AvalonBay broke ground on Avalon Exeter, a 28-story, 187-unit apartment building in the Prudential Center in Boston’s Back Bay.

In some instances, development plans are not a response to improving apartment demand but reflect broader master-planning efforts, including significant investments in new infrastructure. One of the most visible examples of a long-term, large-scale project is the transit-oriented Tysons-Spring Hill Road metro station in the Virginia suburbs of Washington, D.C.

Abstracting from the anecdotal, the lists of projects are growing longer across the property sectors. In a limited number of cases, developers are proceeding without preleasing commitments. In Houston, for example, Prologis has kicked off construction on a 147,000-square-foot speculative industrial property in its fully leased Prologis NorthPark. Prologis is the exception to the rule rather than the norm. Not far away, work has begun on the 276,000-square-foot Sense Road Distribution Center. In this case, the property is significantly preleased to one tenant.