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Category: Apartments, Multifamily Tags: Apartments, construction, Multifamily, Thought Leadership

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Large volumes of new multifamily units are stretched across the United States, but delays make it difficult to get these properties across the finish line. With building material supply chain disruptions, a dire shortage of qualified labor, and difficulties obtaining approvals, developers face headwinds to complete projects on time and within budget.


While the impact of the COVID-19 pandemic has yet to be fully realized in the multifamily space, a housing shortage and demographic considerations indicate increased demand for multifamily in the foreseeable future. In this article, Matthews™ explores the constraints looming and opportunities present in the multifamily market.

Construction Demand & Multifamily Starts

According to the National Association of Home Builder’s Multifamily Market Survey, confidence increased in the market for new multifamily housing for Q1 2021, indicated by improved sentiment from builders and developers. This positive increase is measured by two indexes – the Multifamily Product Index (MPI) and the Multifamily Occupancy Index (MOI).


  • MPI – Measures builder and developer sentiment about current conditions in the apartment and condo market on a scale of 0 to 100. The index is scaled, so a number above 50 indicates more respondents report improved conditions than worsening conditions. It is a weighted average of three key elements – construction of low-rent units, construction of market-rate units, and newly constructed units listed for sale. In Q1 2021, the MPI increased eight points to 51 compared to the previous quarter. This is the first time the MPI has been over 50 in seven quarters. The component measuring low-rent units rose four points to 46, the component measuring market-rate rental units increased six points to 54, and the component measuring for-sale units jumped 13 points to 52.
  • MOI – Measures the multifamily housing industry’s percent of occupancies in Class A, B, and C existing apartments. It ranges from 0 to 100, with a break-even point at 50. Higher numbers indicate increased occupancy. In Q1 2021, the MOI increased one point to 59, improving over the last three quarters.


According to the National Multifamily Housing Council (NMHC), these surges in Q1 2021 coincide with a similar surge in the multifamily unit (5+) starts on a seasonally adjusted annual rate of 440,300, a 28.3 percent increase in the first quarter, down 12.5 percent from the previous year. Multifamily permits (5+ units) rose 28.1 percent in Q1 2021 from Q4 2020 to a seasonally adjusted annual rate of 597,000, up 18.5 percent from Q1 2020. Multifamily completions fell 7.6 percent from last quarter and rose 5.4 percent from a year before a seasonally adjusted annual rate of 362,700. The sizeable quarterly increase in multifamily permits and starts can likely be attributed to seasonal weakness in the fourth quarter and widespread signs of reopening economies. Based on these recent numbers, the National Association of Home Builders anticipates an increase in multifamily starts this year, with 2021 bringing a banner year for new completions.


Top 10 Markets for Multifamily Permit Growth

1. Jackson, Mississippi
2. Mankato-North Mankato, Minnesota
3. Mount Vernon-Anacortes, Washington
4. Abilene, Texas
5. Yuma, Arizona
6. Beaumont-Port Arthur, Texas
7. Dubuque, Iowa
8. Topeka, Kansas
9. Columbia, Missouri
10. Brownsville-Harlingen, Texas

(Source: National Association of Home Builders | Based on growth from November 2019 to November 2020)


Multifamily starts rose 5% alone in April 2021 (Source: Dodge Data & Analytics)


It is important to note that before the pandemic and subsequent recession, almost all scheduled deliveries for 2020 had been started, but developers beginning construction in 2021 will likely face headwinds.


In 2021, more than 400,000 units are expected to be delivered, up 17 percent from 244,380 units in 2020, the most substantial single-year completion in the last three decades. Although 583,000 units were under construction across the country’s 150 largest metros at the end of 2020, this figure is off its recent peak by nearly 100,000 units, reflecting that building starts slowed in 2020. Therefore, trouble starting new projects could reduce the number of deliveries beginning in 2022. Additionally, while high, the year-end construction volume was down from the 667,000 units underway in mid-2020. This means that starts will ease in the coming year, preceded by fewer permits for forthcoming construction.


The largest conventional apartment projects scheduled to deliver in 2021 are being built on the East and West Coasts, according to RealPage. Three of the ten most notable projects are set to come online in Seattle, while Los Angeles and Miami are each expected to receive two of these large projects. The remaining communities are delivering in Newark, New York City, and San Diego.


Here’s a look at the largest projects scheduled to deliver this year:

Multifamily Absorption Persists

Net absorption of investment-grade, market-rate apartments tracked by RealPage fell to 52,661 in Q1 2021, down from the unseasonably strong 75,062 units in Q4 2020. The trailing four-quarter sum increased 7.9 percent in Q1 2021 from the previous quarter to reach 315,789 units, but at that level, it was still down 5.1 percent from the prior year. This marks the first quarter in which the trailing four-quarter sum exceeded 300,000 since pre-pandemic in Q1 2020.


Amid Peak Supply, Delays Plague Multifamily Construction

There has been a pullback on construction starts and schedules due to external market factors causing delays. There isn’t just one overarching cause for these increases in construction timelines, rather a combination of factors ranging from permitting, entitlements, and professional services to economic uncertainty, construction financing, and health and safety concerns.

In a recent survey, completed by NMHC, when asked what impacted construction the most, a constant response was the widespread lack of materials. For example, 75 percent of multifamily developers report construction delays in jurisdictions where they operate, up from 57 in October 2020. And, over 80 percent of respondents reported material delays as builders contend with shortages of appliances, lumber, and windows and doors.

New data from Skender, a Chicago-based construction firm, expands on how much demand for commercial real estate construction materials increased. The steepest hike was refined petroleum products, such as gasoline and asphalt, which rose a whopping 143.2 percent between April 2020 and April 2021. The second steepest hike was lumber which rose 89.7 percent in that same time, and third, steel products were up around 70 percent.

The rising cost of lumber alone adds nearly $13,000 to the market value of multifamily units, translating to renters paying an average of $119 per month more to rent a newly built apartment. (Source: National Association of Home Builders)

With construction costs rising and the labor market struggling with significant unemployment, inability to fill jobs, and lacking the experience needed to deliver outstanding projects, it’s a challenging environment for apartment developers. Further, the pent-up demand for raw materials built up from 2020 stopped production and decreased overall supply as mills and factories shut down. These delays are extending project timelines and delaying project completions for lease-up. Therefore, these factors will limit the ability of the sector to show the rate of expansion in 2021, compared to previous years.

Meanwhile, in 2021 developers sprinted to kick off construction projects to address housing shortages around the nation. Now, home prices are skyrocketing to record highs due to sizable demand, and younger generations are gravitating toward affordable housing options with more flexibility, causing apartment demand to soar, according to CoStar.

Due to this demand, national multifamily rents are growing at a pace that would equate to the most robust apartment rent gains in history if maintained throughout the year, according to a recent CoStar analysis. In addition, the national apartment vacancy rate is roughly six percent, stronger than the market’s pre-COVID-19 levels.


Development Trends to Watch

Given the events in 2020, renter demands have shifted. Here are the trends dominating the multifamily construction market:

Suburbanization: About one-third of multifamily construction has moved to low-density markets in the suburbs and exurbs, which see increasingly more move-ins than move-outs compared to city centers over the past year. The past four quarters are an indicator that suburbs are outpacing higher-density markets. The rise in housing costs and rents in central business districts also pushed many renters to search for affordable housing in the city outskirts. Developers can maximize this trend by designing multi-functional spaces within each unit, as many individuals are now seeking smaller living spaces located close to urban centers rather than within.


Other Design Trends

• Greater Adoption of Technology
• Home Offices Included in Floor Plans
• Introducing More Square Footage
• Better Use of Light and Air
• Greater Sustainability


Townhouse Market Revived: Experts predict the stalling townhouse market from 2020 will eventually get revived and possibly grow to 15 percent market share over the next few years from its current 11 percent. Townhomes offer medium-density housing solutions that are larger and cater to the middle class, offering lower-cost housing options to help meet the demand for lower housing price points. It has been discussed that many multifamily developers will switch to townhouse developments in the coming years.


Single-Family Build-For-Rent: This type of property bridges the gap between single-family homes and multifamily and has recently increased in popularity. Today, many people want single-family structures rather than high-rises but cannot afford the down payment. As a result, the single-family build-to-rent market has grown about a four percent share of single-family starts. This share is expected to jump to five or six percent over the next two to three years.


Other Construction Trends

• Disruptive Technology
• Artificial Intelligence
• Increased Competition for Land
• Sustainability
• Increased Demand Among Key Demographics
• Increased Risk Due to Supply Chain and Labor Shortages
• New Focus on Amenities


Overall Market Fundamentals

As measured by the National Council of Real Estate Investment Fiduciaries (NCREIF), the market value of investment-grade apartments rose 0.8 percent from Q4 2020 and fell 1.1 percent from a year ago. Until the first quarter of 2020, the market value of apartments had not fallen quarterly since Q1 2010. However, apartment values have been recovering through the previous two quarters, which is an excellent sign for developers.


Sales volume is also rebounding since dropping to the lowest level recorded by Real Capital Analytics since 2012. In Q4 2020, sales volume reached a record-high of $62.5 billion. Currently, sales volume in Q1 2021 recorded $35.5 billion, but cap rates remain unchanged at the record-low of five percent.


Overall, 2021 will bring another year of substantial apartment completions across the United States, attracting positive attention from developers and investors. Scheduled deliveries already top 2020, with many gateway markets and secondary markets receiving large sums of units. For more information, please contact a Matthews™ specialized agent.

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