Surge in multifamily market about to end

August 11, 2010

Multifamily construction spending increased 8.4% in the first seven months of 2008—after having dropped 19% during 2007—but the recent annual growth pace is set to slow with no gains expected through the end of 2009.

This sector's growth was largely an offset to declines in the single-family market. Households that lost their single-family home retreated to apartments, and households unable to get a mortgage loan remained in rental housing. The apartment market will continue to perform better than the condo/co-op market.

The expected slowdown will be driven by the progressively weakening U.S. economy, more competition from the single-family market, and the abrupt weakening of regional economies in several of the largest multifamily markets.

Expect multifamily vacancy to rise from its current 10% level and for rents to dip slightly. The loss of 605,000 jobs so far this year—with job losses continuing into next year—will force some tenants to double up with family and friends. The loss of purchasing power due to high energy prices will have the same impact, as will the exodus of some recent immigrants who now find it harder to find work or avoid deportation.

Single-family rentals will progressively become more available and attractive to current and prospective multifamily tenants. The single-family vacancy rate has nearly doubled to 2.8% and will rise slightly as foreclosures continue. Single-family home prices—and hence rental rates—will continue to drop relative to apartment rents for many more months.

In terms of multifamily building permits, New York City leads the pack with nearly 15% of the national total. However, New York City faces a potential collapse in housing demand from massive Wall Street layoffs and bonus cuts. Las Vegas, another hot multifamily market, has seen its permits more than double in the last year as the wealthy snap up vacation condos, but the market segment is also collapsing with the weakening economies in the U.S., Europe, and Asia. A few other cities popular with multifamily projects have experienced weak economies, including Los Angeles, Miami, Phoenix, and Washington, D.C.

         
 

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