Construction of new multifamily buildings may slow in 2018, but even if it does, competition from new buildings will likely remain a top concern for existing landlords, observers say.

The pace and volume of new apartment construction has been an overriding concern in the multifamily sector for months, and new supply has sapped landlords' momentum in New York and San Francisco, two markets that had been among the country's strongest in the recent years' economic recovery. When more buildings enter a given market, owners of existing properties are often unable to raise rent — and may even be forced to lower it — if they want to retain tenants.

On second-quarter earnings conference calls, executives at some multifamily real estate investment trusts, including Equity Residential and AvalonBay Communities Inc., said the worst of the construction wave may be passing, and predicted gradually improving fundamentals in 2018.

New supply estimates suggest, however, that new apartment openings nationwide will remain high. Data firm Axiometrics, a Real Page company, which estimates 389,723 new units will open in 2017, forecasts 271,842 units in 2018, a level roughly equal to that of 2015. That 2018 figure, though, is based only on buildings currently under construction. When the firm adds in buildings it anticipates will start construction in time for a 2018 opening, its prediction for the year rises to more than 320,000 new units.

The Axiometrics forecast is optimistic compared to an analysis by Canaccord Genuity REIT analysts who studied building permits in 366 markets nationwide and used that data to predict openings of new buildings, sometimes on a 12- to 24-month delay from the time the permits are issued. AvalonBay executives made similar comments during an earnings conference call, noting that much of the new construction planned for 2017 was taking longer than expected, delaying relief for landlords.

Chuck Ehmann, real estate economist at Axiometrics, said the firm is predicting a slowdown in new construction in 2018, but is wary of saying 2017 will be the peak, since elevated construction numbers have been surprisingly persistent. Rather, he said, the appropriate metaphor for new supply may be a plateau.

Expectations for new supply vary by market, but the study's broad conclusion is that new supply will accelerate in late 2017 and throughout 2018, Canaccord analyst Michael Kodesch said.

"I think people are starting to understand that it's going to spill into 2018, but we're seeing it increasing over the next 12 months," Kodesch said in an interview. "I think people were expecting it to taper second half of 2018, maybe even earlier, but based on that permitting data it doesn't look like that's the case."

In general, he said, suburban-oriented portfolios such as Independence Realty Trust Inc., Bluerock Residential Growth REIT Inc., Mid-America Apartment Communities Inc., Preferred Apartment Communities Inc., NexPoint Residential Trust Inc. and to a lesser degree Camden Property Trust are seeing less supply acceleration than urban-oriented portfolios such as AvalonBay, Equity Residential, UDR Inc., Apartment Investment and Management Co., Monogram Residential Trust Inc. and Essex Property Trust Inc.

The "slippage" of planned property openings from 2017 to 2018 is making landlords' worries last longer — "It's the difference between the 24-hour flu and pneumonia," Mizuho Securities USA Inc. analyst Richard Anderson said in an interview.

If there is a silver lining for the multifamily REITs, Anderson said, it is the idea that construction delays represent a more difficult environment for builders. If new buildings are becoming harder to build, then that, in the long term, is a good sign for existing property owners, Anderson said. While industry fundamentals look difficult in the coming months, and stock prices may suffer in turn, there may be buying opportunities for shares of some of the coastal urban REITs based on expectations of a stronger future, Anderson said.

"It's a reflection of the fact that it's the first step to a decline in the process of new development," he added. "It's just more expensive, more difficult, and all those things speak to the potential for development to come down as a percentage of stock when we look into 2019 and 2020."

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