NAHB Economists Forecast Weakening Multifamily Market

In a session at the International Builders Show moderated by Dean Schwanke, Danushka Nanayakkara-Skillington of NAHB and Selma Hepp of CoreLogic delivered their 2023 multifamily outlooks. Photo by Diana Mosher

Multifamily construction boomed last year, up an estimated 15 percent from the previous year, according to economists speaking at the National Association of Home Builders International Builders’ Show in Las Vegas. In 2022, multifamily construction exceeded a 500,000 annual pace for the first time since the Great Recession. However, NAHB is projecting that multifamily starts will fall 28 percent this year to 391,000 total—they expect this will stabilize in 2024 at about 374,000 starts.

There are currently 943,000 apartments under construction, up 24.9 percent compared to a year ago (755,000). This is the highest count of apartments under construction since 1974, according to NAHB.

“Slowing rent growth, rising unemployment, tightening commercial real estate financing conditions and a substantial amount of supply in the construction pipeline have caused a large backlog of multifamily developments,” said NAHB Assistant Vice President for Forecasting and Analysis Danushka Nanayakkara-Skillington.

Permits and Regulations

Looking at another metric, Nanayakkara-Skillington noted eight of the top 10 multifamily markets, as measured by the number of permits, posted yearly increases from November 2021 to November 2022. The New York-Newark-Jersey City, N.J., region, the largest in the nation, registered a 9 percent increase in permits, while Atlanta-Sandy Springs-Roswell, Ga. had the highest increase at 203 percent.

The following markets also posted gains: Dallas-Fort Worth-Arlington, Texas; Houston-The Woodlands-Sugarland, Texas; Los Angeles-Long Beach-Anaheim, Calif.; Washington, D.C.-Arlington-Alexandria,Va.; Phoenix-Mesa-Scottsdale, Ariz.; and Minneapolis-St. Paul-Bloomington, Minn. The markets in Austin-Round Rock, Texas, and Seattle-Tacoma-Bellevue, Wa., posted declines compared to the previous year.

Referencing research conducted by NAHB and the National Multifamily Housing Council, Nanayakkara-Skillington added that regulations greatly affect multifamily development costs.

“Apartment and condo developments can be subject to a significant array of government regulations including zoning requirements, building codes, impact fees, permitting requirements, design standards and public land requirements, among others,” said Nanayakkara-Skillington. “These regulations are exacerbating the nation’s housing affordability crisis.”

Supply-side challenges have impacted multifamily over the past several years, including a lack of skilled labor. There were 388,000 open construction positions in November 2022 compared to 352,000 a year ago. Builders are reporting shortages of labor in framing crews, carpenters, bricklayers/masons and concrete workers.

Building material and product shortages have also been an issue for the industry. NAHB data show that the products most difficult to get are appliances, transformers, windows, doors and HVAC equipment.

Most pandemic-related building material shortages have eased. The major exceptions are HVAC equipment and certain categories of ceramic materials (ceramic tiles, clay bricks and cement-based building materials), which have gotten slightly worse.

The cost of building materials has been another supply-side challenge for the industry, noted Nanayakkara-Skillington. “While the rate of increase in building materials is down year-over-year, costs still remain elevated.”

A Decline in Sales

Multifamily markets took a hit in the second half of 2022, said Selma Hepp, chief economist of CoreLogic, during her multifamily market outlook at IBS. Sales activity slowed as market uncertainty, high mortgage rates and expectations of a recession rattled buyers.

“It feels like this has been one of the most anticipated recessions because we’ve been talking about it for so long,” said Hepp.

Population growth will continue in the Mountain West, Southeast and Texas, according to research presented by CoreLogic’s Hepp. The forecast looks at 11 top states with highest increase in population by 2030. Chart by CoreLogic. Image by Diana Mosher

The decline in sales was more pronounced in the West. “This is partially due to inventory but also partially due to some of the rental protectionism we’ve seen expand during the pandemic,” explained Hepp.

“2021 was a banner year for multifamily property sales,” she added, “but since then we have seen a pull back. In the first three quarters of 2022, multifamily sales were down about 15 percent. The question is how much sales went down in the fourth quarter. By some accounts they were down in the four quarter year-over-year about 60 percent.”

Hepp noted that apartment valuation slowed from 23 percent annual growth to 2 percent by year-end 2022. Surging mortgage rates are driving cap rates higher slightly higher. Apartment cap rates are increasing from record lows. Cap rates remain lowest in markets with high population growth. Price growth is highest in high population growth markets with the highest employment.

“Demand for homes (to buy or rent) has weakened considerably,” said Hepp. Rents are slowing across the markets; however, rents in pandemic boomtown markets are now cooling the most rapidly.

According to Hepp, investor activity remains really strong despite higher rates. “Interestingly, mortgage rates has had a much worse impact—or been more evident—on the single family purchase market because mortgage rates have impacted affordability so much,” said Hepp.

“The impact on multifamily is a little bit more nuanced for a number of reasons. One is that folks now can’t afford homes, so they are staying in rental properties a little bit longer. The other thing is because the demand for single family homes has gone down so much, the folks that are going to sell their homes can now potentially be renting them—and this adds to the rental inventory.”