How to Analyze Supply and Demand For Apartment Buildings

One of the most important ways to use all of the data gathered in a real estate market analysis is to examine the supply and demand factors for a particular type of real estate. For example, an investor considering the construction or purchase of a new multifamily residential property uses the market analysis to determine what cash flows they can expect to receive given the expected demand for units. The demand must be high enough to generate cash flows that provide a rate of return high enough to make the investment feasible.

In order to estimate the demand for multifamily housing units, it is necessary to understand recent population growth trends for the city. Then, it’s important to consider the major industries in the market area and the forecasted growth for those industries over the next few years. You can then put this information together to forecast multifamily housing demand and compare that demand to the existing and proposed supply of multifamily units. This case study takes data about population and industrial activity in the Orlando, Florida region and analyzes supply and demand of multifamily residential units in the region.

Recent data from the U.S. Census Bureau and the Orlando Economic Development Commission lists the total population of the Orlando metro area at 2,387,138 (2016). Between 2015 and 2016, the population of the Orlando metro area grew by 2.6%. That made Orlando the fastest growing region in the United States. The Orlando Economic Development Commission estimates that population growth in the region since 2000 equates to a gain of 138 people per day. Population growth is mostly fueled by domestic migration. Americans moving to Orlando for retirement in warmer weather or for new career opportunities account for about 40% of the population increase. International migration (mainly from Central and South America) accounts for 34% of the increase in population. People have been moving to the Orlando area due to the region’s comparative advantages (climate, entertainment and lifestyle, and economic growth). Without these advantages, Orlando would not be one of the fastest growing regions of the country.

With an average household size around 2.5, that means there are an estimated 954,855 households in the Orlando metropolitan area. Data from the American Consumer Survey indicates that about 43% of the population is renters. So, 43% of households would give an estimated demand of 410,588 multifamily units.  In reality, not all renters live in multifamily units since many rent single-family homes. Therefore, it is necessary to estimate how many of those renters occupy multifamily units.

A 2016 report from Fannie Mae estimated that there were 156,000 multifamily units in the Orlando metro area with a 5.75% vacancy rate. So, in 2016 there were around 147,030 occupied multifamily units (156,000 x (1-.0575) = 147,030). This means an estimated 35.8% of the households that are renters occupy multifamily units while the remaining 64.2% of renters occupy single-family homes.

Employment data from the Bureau of Labor Statistics confirms that economic growth is driving the population growth in the Orlando metro area. In fact, job growth from 2015-2016 in Orlando was over twice the national average. A strong economy and growth in the number of jobs indicates that the population should continue to grow over the next few years unless there is a major shift to the national economy or a natural disaster. Furthermore, the job growth rate of 4.22% exceeded the population growth rate of 2.6%. If the major industries in Orlando continue to grow at this pace, more new workers will need to move into the region to fill these new jobs. So, forecasted population growth may be higher than the average of 2% seen over the past 10 years. It might be more appropriate to estimate population growth of at least 3% annually.

 AreaIndustryAnnual Average EmploymentChange Employment 2015-2016Growth Rate
2016U.S. TOTALTotal, all industries141,870,0662,378,3671.71%
 Orlando-Kissimmee-Sanford, FL MSATotal, all industries1,157,53646,8444.22%
2015U.S. TOTALTotal, all industries139,491,699  
 Orlando-Kissimmee-Sanford, FL MSATotal, all industries1,110,692  

Using a Location Quotient Analysis, Orlando has a competitive advantage in the services, construction, and leisure and hospitality industries. All of these industries should remain strong over the next few years as long as the national economy continues to grow and national unemployment remains low.

IndustryLocation Quotient
Goods-producing0.664674599
Natural resources and mining0.330605357
Construction1.213038593
Manufacturing0.41740123
Service-providing1.143132811
Trade, transportation, and utilities0.99493952
Information0.983670576
Financial activities1.092321103
Professional and business services1.153196509
Education and health services0.819187622
Leisure and hospitality1.952753058
Other services0.993404995
Unclassified0.13973717

The economic base analysis of the Orlando metro area showed that the region has an economic base multiplier of around 1.5. This means that if one of these base industries created an additional 100 jobs, the entire region would have a resulting total employment increase of 150 jobs. If only leisure and hospitality, services (providing), and professional and business services all created the same number of jobs the following year, it would cause additional job growth of around 28,000. So, there is the possibility for continued high population growth in the region.

IndustryAnnual Average EmploymentChange Employment 2015-2016
Total, all industries1,042,52643,773
Goods-producing113,1047,874
Natural resources and mining5,052-324
Construction66,1756,884
Manufacturing41,8781,314
Service-providing929,42235,899
Trade, transportation, and utilities219,2057,049
Information22,448-292
Financial activities70,8871,340
Professional and business services188,41610,818
Education and health services144,7345,111
Leisure and hospitality247,8609,333
Other services35,5632,808
Unclassified310-266

Apartment Unit Supply and Demand

The simple analysis presented above estimated that the demand for rental units in 2016 was around 147,030. Consider a situation where the Orlando metropolitan area had a supply of 156,000 multifamily units that year and a vacancy rate of 5.75%. If the population grew by 3% per year and the proportion of renters stayed the same, by 2018 the demand for multifamily units would fill all of the existing supply. So, there is clearly a demand for additional multifamily units. How many new units could the market absorb each year?

No new supply
 201620172018
Total units156,000156,000156,000
Vacant8,9704,55916
Multifamily Renters147,030151,441155,984

With a population growth of 3% and a similar proportion of apartment renters, that would mean the multifamily renting population in the Orlando metro area would grow by between 4,500 and 5,000 units per year. Real estate developers would need to increase the supply of multifamily units by a minimum of 3,250 per year just to meet the housing demand through 2022. Here’s what the forecasted supply and demand would look like if real estate developers delivered 5,000 new apartment units per year:

5,000 new units annually
 2016201720182019202020212022
Total units156,000161,000166,000171,000176,000181,000186,000
Multifamily Renters147,030151,441155,984160,664165,484170,448175,562
Vacant8,9709,55910,01610,33610,51610,55210,438
Vacancy rate5.75%5.94%6.03%6.04%5.98%5.83%5.61%

Conclusion

This example provided a simple method for using data from a real estate market analysis to forecast apartment unit demand. A more in-depth forecast would consider actual growth forecasts in key industries, a more detailed look at actual supply and construction permits for multifamily units in the area, and how changing economic factors could influence the percentage of the population that chooses to rent rather than to buy a home. The results from the final chart considering changes in supply and demand over time can also be extended to consider the growth rate of expected market rents. Although the detailed inputs can become more complicated, the basic framework for analysis is the same.

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