Builders, Developers: Multifamily Landscape is Improving
Builders and developers felt in the fourth quarter of 2017 that the multifamily landscape was improving, according to the National Association of Home Builders’ Multifamily Production Index (MPI) released in February.
The MPI, which measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100, improved seven points to 53 in the fourth quarter. The index is scaled so that a number above 50 indicates that more respondents report conditions are improving than getting worse.
The MPI measures construction of low-rent units, market-rate rental units and “for-sale” units, or condominiums. All increased in the fourth quarter: low-rent units rose two points to 56, market-rate rental units climbed 11 points to 54 and for-sale units increased nine points to 49.
The Multifamily Vacancy Index (MVI), which measures the multifamily housing industry’s perception of vacancies, remained even at 41, with lower numbers indicating fewer vacancies. The MVI has been fairly stable since 2013, after peaking at 70 in the second quarter of 2009.
“Multifamily developers continue to see solid demand in many parts of the country,” said Steven Lawson, president of The Lawson Companies in Virginia Beach, Va., and chairman of NAHB’s Multifamily Council. “However, developers need to be careful to manage costs as prices of land, labor and some building materials continue to rise.”
Low home inventory will slow renters who want to buy
Although multifamily housing starts are expected to slightly moderate this year and in 2019, industry leaders project production levels to remain stable in a range considered normal.
“For the foreseeable future, production of multifamily housing is expected to be running at a trend level where supply is meeting demand,” NAHB Senior Economist Michael Neal said in January.
Multifamily starts are expected to edge 2 percent lower this year to 354,000 units from a projected 360,000 total in 2017 and fall another 3 percent to 344,000 in 2019.
However, Neal noted this does not indicate weakness in this market segment. “From 1995 through 2005, multifamily starts averaged 335,000,” he said. “Construction activity during the past four years has been running above this trend, and we are seeing the market stabilizing near more normal production levels.”
Ironically, one factor contributing to the stabilization of multifamily activity is the low inventory of homes on the for-sale market. Since 2007, the inventory of new home sales has dropped nearly 50 percent. Owner-occupied homes for sale, while currently on an uptick, have charted a similar path.
“We are in a world where owner occupied inventory remains anemic,” Neal said. “We have seen an increase over the last few years of inventory for new homes for sale, but the inventory of homes just remains at very depressed levels. This is important, because we have an elevated level of potential demand in the form of the 5-6 years of growth in renter households but at same time we have a low inventory on the owner-occupied side.”
NAHB estimates that there are 21 renter households for every available home on the market, which will make for a slow grind for renters to buy homes despite favorable economic conditions and low mortgage rates.
“There just aren’t enough homes available for sale to meet this potential level of demand,” Neal said.
Meanwhile, the national rental vacancy rate registered a slight uptick last year, but stands at its low mid-1990s level of 7.5 percent.
Neal notes that rental vacancy rates in buildings of 10 or more units exceed those in smaller buildings and may suggest an industry-wide slowdown in construction of larger buildings.
Affordable market has obstacles to overcome
Lawson, whose firm builds both affordable and market-rate housing, addressed the predicted increasing demand for affordable rentals as a growing number of households are rent burdened, meaning they are paying too much of their income in rent.
“Demand is far outstripping supply and the supply-side of the equation is constrained by Low-Income Housing Tax Credit pricing, rising construction costs and higher interest rates,” Lawson said.
While the new tax reform law has significantly lowered corporate tax rates, it has also reduced tax credit prices, he said.
“Rising labor and materials costs as well as falling prices for Low-Income Housing Tax Credits have changed the landscape so that some projected affordable projects are no longer viable,” Lawson said. “Moreover, labor shortages are driving up labor costs and spreading out construction schedules.”
On the plus side, the newly enacted pro-growth tax law will mean lower tax rates for most individuals in all income groups, which will put more money into the pockets of families, including renter households.
Furthermore, the retention of private activity bonds as part of the new tax law will enable the Low-Income Housing Tax Credit to maintain its effectiveness as the most indispensable tool for the production of affordable housing, NAHB says.