The multifamily construction revival has lagged the modest single-family construction turnaround but that may be changing. High multifamily vacancy rates and a shadow inventory of single-family and condo homes for rent have slowed or stopped rent increases. Lower potential revenue makes it more difficult to obtain financing at a time when financing for any
residential development is difficult. However, the complexion of demand and the industry has changed significantly over the last decade and the revival will be influenced by these changes.
First, the share of multifamily construction built for sale will reverse from a low of 13 percent back to a more normal 20 percent to 25 percent. During the homeownership boom, as much as half the multifamily construction was intended for sale. The excess inventory will be sold or rented gradually and condo construction will return slowly.
Second, affordable rental projects supported by the low-income housing tax credit (LIHTC) and tax-exempt bonds were historically about 30 percent of production. Production levels have fallen as purchasers of LIHTCs disappeared and the amount of equity raised from the syndication markets fell. While the absolute production level fell by half, the affordable housing share of production rose as the condo and market-rate components dropped. Affordable housing production will account for almost half of the production of units in buildings with five or more units in 2010 and will retain a larger than normal share for several years as the environment for LIHTCs improves with support from the federal government.
Third, production has been shifting to larger buildings over the past decade, and that trend is likely to continue. Larger buildings are built by larger companies. Larger companies have greater access to the limited credit available and greater staying power to endure the challenging local approvals of multifamily rental projects. Between 1999 and 2009, units in buildings with 50 or more units rose from 13 percent to 39 percent of completions.
Fourth, contrary to the larger building trend, there has also been a trend toward more multifamily production in smaller metropolitan areas. At high points of multi-family production such as 1986 and 2007, three-quarters of the production was in metropolitan areas with more than 1 million people. As production levels fell, the drop was not as severe in places under 1 million, so the share of production rose from about one-quarter to one-third. As the industry recovers, the share will shift back to larger metropolitan areas.
Fifth, the share of single-family attached and detached home renters has remained relatively level at one-third of all renters. Single-family vacancy rates have risen more than vacancies in multi-unit buildings as lenders and speculators offer homes for rent. From the mid-’70s through the mid-’90s, single-family vacancy rates were 40 percent to 60 percent of the multifamily rate. Beginning in 1998, single-family vacancy rates increased faster than multifamily and accelerated after 2005. Single-family rental vacancy rates are now 90 percent to 100 percent of multifamily and sit in direct competition to new rental units. Absorption of the extra single-family homes will take years although some inventory will provide housing to foreclosed families who favor single-family homes but are not able to own.
Sixth, the number of renters has also remained remarkably steady until recently. From 1989 to 2005, the number of renter households held around 34 million, but since mid-decade the number of renters has increased steadily at a rate of 700,000 each year, accounting for virtually all the household growth. The increased demand for renting should continue for several years. Tighter home buyer credit, diminished credit scores, and Echo Boomer demographics feed demand. The trigger for the demand will be improving employment, which will be slow but steady for the next three to four years. But other policy changes, such as a proposed tax on gains income due to a carried interest, could also affect the future of multifamily starts.
