Developers have followed the demand, and new supply from the first quarter of 2020 through the third quarter of 2022 averaged 70,272 net new units in southern and western markets per quarter, a 30% increase from the quarterly average of 54,040 between 2015 and 2019.
However, supply chain backlogs, inflation and rising land costs created headwinds for new developments. Projects became harder to pencil out financially, driving developers to add density.
In 2022, the average size of new units was 857 square feet per unit, 6.62% lower than the average from 2017 to 2019. Throughout 2023, the average size of new units will continue to be at least 5% smaller than the 2017-2019 average of 907 square feet per unit.
Some of this reduction can be attributed to a slight increase in the percentage of new units that are studios or one-bedrooms. However, it's mainly driven by the shrinking size of each type of unit.
One-bedroom and two-bedroom apartments built in 2022 are 4% and 8.2% smaller, respectively, than those built in 2017.
With economic uncertainty and high construction costs, developers have little incentive to build bigger units. In fact, three-bedroom units have the highest average vacancy rates among apartment models, at 6.36% as of the third quarter of 2022.
Studios, one-bedrooms and two-bedrooms have vacancy rates of 6.06%, 5.89% and 5.63%, respectively.
Since the decreasing unit size has not had a negative impact on occupancy, developers and landlords will be able to capture greater returns by continuing their densification strategies.