Housing shortage prompts multifamily construction revival
Wednesday, February 28, 2018
Multifamily construction activity slid in 2017 in the face of rising vacancy rates and concerns about overbuilding. That trend has begun to shift direction in recent months as the market for single-family homes remains constrained by shortages of available and affordable new and existing homes.
As 2018 begins, multifamily appears to be experiencing a revival in demand.
A strengthening economy, greater confidence in job and financial security, and increases in household income, as well as sharp rises in rents, are driving demand for home ownership, especially for single-family homes. With fewer existing homes on the market, sales of newly-built single-family homes surged last fall among buyers who could afford them. However, for most lower- and middle-income households, including the largest share of potential first-time buyers, these houses are priced out of their reach.
According to the Joint Center for Housing Studies at Harvard University (JCHS), the surge in rental demand that occurred between 2006 and 2016 has been declining in the past two years. While it may not reach quite the same levels, that trend is expected to reverse in the coming decade.
Due to the shortage of affordable homes for sale, as well as a swelling wave of young people wanting to live independently and an uptick in the proportion of persons age 50 and older choosing to rent, JCHS projects that the number of renter households will increase by nearly 500,000 annually in the period from 2015 to 2025.
Construction figures from January may be an indication that rising demand for rentals, plus growing purchases of more affordable condos and co-ops, are reactivating the multifamily sector.
After dropping 8.2 percent in December, housing starts (in number of units) jumped 9.7 percent in January, up 7.3 percent from the previous January, with most of that increase attributed to multifamily activity. Single-family starts increased by 3.7 percent. Requests for multifamily permits also rose by more than 7 percent, while those for single-family homes fell by 1.3 percent.
Dodge Data & Analytics reports that after declining by 12 percent in 2017 from the previous year, the value of new multifamily construction (in dollars) skyrocketed 39 percent in January. The value of single-family construction declined 3 percent for the month, following 8 percent year-over-year growth in 2017.
Similarly, the American Institute of Architects' Architectural Billings Index for January shows Multifamily Residential outperforming all other sectors for the third month in a row. In addition, the report states, the residential sector was the only category of the four building sectors included in the index to experience increase demand for design services in January.
At the same time, sales of newly built single-family homes in January fell for the second month in a row, down 7.8 percent from December's 9.3 percent decrease (following a strong showing in September and November). Some of that drop no doubt can be attributed to the unusually frigid weather in parts of the country.
However, along with slowing sales also came a slight softening in the median and average price of homes purchased. That may reflect both builders' efforts to produce more affordable homes as well as pressure from buyers to hold back price increases.
Sales of existing homes also slipped for the second month in January, by 3.2 percent, slightly less than December's 3.6 percent drop. Lawrence Yun, chief economist for the National Association of Realtors, attributed the weak sales to an "utter lack of sufficient housing supply" and continued hikes in prices, noting that realtors reported robust buyer traffic.
Sales of single-family homes were down 3.8 percent for the month and 4.8 percent below the same time last year. Existing condominium and co-op sales, however, rose 1.6 percent, although they were down 4.6 percent from last January, attributable in part to a 7.1 percent jump in the median cost from a year ago.
In addition to these trends, as the number of available lots become scarcer and with cities inclining toward greater urban density, the tide at the moment is in favor of multifamily construction. That is likely to continue as long as single-family home sales inventories remain low.
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