Capital inflow keeps high vacancy rate from depressing the multifamily housing market
Developers are building multifamily units currently at a 340,000-per-year pace, down from the peak of 400,000 units at the end of 2003. Construction spending for multifamily buildings continued to rise until last July due to the usual lag from start to completion, the rise in materials costs, and a continuing shift to vacation condos from starter apartments.
Construction spending has dropped 2.3% so far, with a similar decline expected by December. Fueled by the creation of an expected 2.5 million new jobs in 2005, spending will increase 7% over the course of 2006.
Prospects of higher returns are sending a large inflow of capital to real estate, including multifamily, from the equities and bond market. This inflow is easing the usual depressing effect of high vacancies — new buildings are under way in metro areas in the South and West that have double-digit vacancy rates.
Investors are paying premium prices for buildings in rapidly expanding cities and accepting slim (or even negative) initial net operating income in anticipation of future capital gains. Expected higher occupancy in a continuing economic expansion will boost building asset values for the next few years.
In many high-population-growth markets, building prices have been bid up so much that a new building — even one which can expect a few years with high vacancies — promises a better investment return than an overpriced existing building.
Multifamily construction spending
Billions of dollars, seasonally adjusted annual rate
|Source: U.S. Census Bureau; Forecast (f): Reed Research Group
New job creation will fuel a 7% increase in construction spending for multifamily residential in 2006.