Coastal cities stay strong as multifamily market peaks

Multifamily construction spending will peak late in 2004 and then decline about 8% through the end of next year. The expected spending decline will be more a result of the completion of the large number of units started earlier in 2004 than the modest fall in new units started that is expected by the end of next year. The annual rate of new multifamily unit starts is expected to decline by 10,000 by the end of 2005, from 330,000 to 320,000.

The market slowdown will be concentrated in market-rate, entry-level apartments in cities in the South and Midwest with very high apartment vacancy rates. The Q2 rental vacancy rate rose to 13.0% in the South and 11.7% in the Midwest. Vacancy rates are much lower in the Northeast (7.0%) and the West (7.7%).

Most at risk for a decline in starts are the automotive manufacturing and airline hub and headquarters cities, where substantial job losses are expected. Apartment demand in cities in the South and Midwest will be boosted by an increase in jobs and by households priced out of the single-family and condo markets by higher mortgage rates. But this positive impact on starts will be more than offset by the surplus of available apartments and the revival of the manufactured (not modular) housing industry.

Multifamily housing starts are likely to expand slightly through next year in the Northeast and in Florida and California metro areas, where surging home prices indicate that the restricted housing supply is still short of current demand.