The multifamily housing market — apartments, duplexes, condominium units and co-ops — has told a tale of two trends during the past three years. Total starts have waned, but the total dollars spent on those starts have increased considerably, which is good news overall for building product manufacturers, but bad news for proponents of affordable housing.
An examination of total starts implies that multifamily is not the healthiest of markets. Total starts of multifamily units nationwide have stagnated since 1999. During 2001, builders started a total of 329,400 multifamily residential units, a decline of 2.5% from the 2000 total. Through the first quarter of this year, multifamily starts continued to fade modestly with the total 4.6% lower than in the same period in 2001.
Even with a decline in new supply being added to the multifamily inventory, the nationwide rental vacancy rate has risen to its highest level of the past 30 years. During the first quarter of 2001, the U.S. rental vacancy rate stood at 8.2% — already higher than the average over the past 15 years. The vacancy average increased to an even higher 9.1% of nationwide rental units during the first quarter of this year.
Rental vacancy rates increased in all regions of the country from the first quarter of 2001 to the first three months of this year. During the first quarter of 2002, regional vacancies rates were lowest in the Northeast (5.8%) and West (7%), but at double-digit levels in both the Midwest (10.3%) and the South (11.9%).
The answer to rising vacancies for developers and builders has been to decrease starts but increase investment in high-end units. The Commerce Department estimates that $31.2 billion in new multifamily construction work was completed during 2001. This was 11.1% higher than in 2000, even though the actual number of units started declined during the same period of time. This is clear evidence that the average value of each new multifamily unit is increasing sharply. Good news for building material and supplies manufacturers and distributors, because an increasing mix of higher-priced, higher-quality products usually results in higher profit margins for the companies supplying lighting, carpeting, appliances and HVAC systems.
Through the first quarter of 2002, this trend accelerated, even as multifamily housing starts declined at a slightly steeper rate. Multifamily construction spending during the first quarter was 18.2% higher than in the same period of 2001. So the mix of new multifamily construction is considerably more upscale now than it was a few years ago — again, a boost for product manufacturers, but a damaging blow to affordable housing policies and initiatives.
Based on the spending trend in evidence through the first four months of 2002, there is little doubt that the number of dollars spent on multifamily units will grow at a healthy rate again this year, although a moderate decline is forecast for starts.
During 2003, expectations are for another strong increase in multifamily spending and a return to modest gains for starts.