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Rising interest rates will slow multifamily

By Jim Haughey, Reed Business Information Economist

May 1, 2005

Building Design and Construction

Multifamily construction spending has been stalled since last summer, rising only enough to pass through higher materials prices. However, this underestimates the strength of the market because it is likely that the mix of multifamily projects was tilted toward low value, entry-level apartments targeted to the 200,000 newly employed people each month.

Multifamily permits rose 10% in the last five months compared to the first nine months of last year. The build out of these permits will boost multifamily construction spending nearly 10% this year while single-family on spending grows only about 5%.

But later this year, the impact of higher mortgage rates will begin to slow the condo and co-op part of the multifamily market. These are typically the most expensive multifamily units. Construction spending will stall again, rising only with cost inflation. This will result from 30-year fixed rates reaching 6% in March, drifting erratically higher for the rest of this year, reaching near 7% by the end of 2006.

Multifamily is also likely to lose some starts to manufactured housing. Manufactured home shipments hit a two-year high at the beginning of 2005. The rising sales of these units results from the end of a six-year recession in this industry. The survivors have cleared out surplus inventory, redesigned their products to meet a new, high-quality HUD standard, and are now able to "title" rather than register (like a boat) their homes in some areas.