Multifamily construction will stay relatively strong in 2007 but will slip marginally below its 2006 peak. The exodus of speculative for-sale buyers is weakening the condo portion of the market, just as it is in the single-family market. Large numbers of empty condos will soon be offered for sale, adding to the surplus of condos being reported. The condo market will remain weak for several months even after the single-family market stabilizes by late spring 2008.
Demand for apartments is rising to accommodate new households in a still-growing economy, as well as to house those who have had to defer buying a home due to higher mortgage rates. Apartment demographics are turning favorable, with the leading edge of the “echo boom” generation now reaching apartment rental age. Real estate investors are realizing above-average operating incomes from apartments whose asset values are also rising. Property & Portfolio Research reports that apartment rents rose 5.1% last year, the vacancy rate hit a four-year low, and the tail end of the condo conversion boom caused a small decline in the total supply of apartments last summer. The apartment shortage will be partially met by converting condos to apartments, but most of the shortage will be met by new construction.
Total multifamily permits declined 30% from the early 2006 peak, but multifamily starts declined only 15% through October. The long construction cycle delays the impact of a weaker market on multifamily job site construction spending, so a small decline is evitable this winter, almost entirely for condos. This will be accompanied by a small further decline in permits due to the huge backlog of permitted units waiting to break ground.
Reed Construction Data projects that the value of multifamily starts will drop only 4% in 2007, mostly early in the year; they will then expand 7-8% in each of the next two years. Apartment hot spots: Atlanta, Dallas, Houston, and New Orleans. Florida, California, and Washington, D.C., will remain strong multifamily markets but with new starts well below the 2004-05 peak. The Great Lakes states will largely miss out on the apartment boom.
