Multifamily Construction, Vacancies Both Inch Upward

Construction of multifamily low-rent units, market-rate-rent units and “for sale” units all inched up in the first quarter of 2011, as did multifamily vacancies. Those are the findings of the National Association of Home Builders (NAHB) Mulitfamily Production Index (MPI) and its Multifamily Vacancy Index (MVI).

The MPI, which provides a composite measure of low-rent, market-rate and “for sale” unit construction, inched up to 41.7 in the first quarter, from 40.8 in the fourth quarter of 2010, reports Paul Emrath, vice-president of survey and housing policy research for the Washington, D.C.-based NAHB.

The reading of 41.7 was the MVI’s highest level since 2006. The index is based on whether more multifamily developers and property owners believe conditions are improving or that they have grown worse since the last quarter, with 50 being the break-even point. The highest MVI in the last seven years was recorded in 2005, when the index reached 57, Emrath says.

The index offered very good news for one segment. Notes David Crowe, NAHB chief economist, “Not only is the overall index on the rise, the market-rate rental component has improved dramatically. In the first quarter, the market rate rental component was 60.5, the highest level in more than five years.”

There are several factors behind the improvement, Emrath tells MHN. “First, we’re coming off a very low point, so there’s a lot of room for improvement,” he says. “Also, as the economy grows, there’s pent-up household formation, and many of these households will be renting households. They don’t face the issues of having to sell an existing house to purchase a new one.”

Meantime, the MVI ticked up a bit in first quarter of 2011, to 35.0 from 33.3, after six quarters of improvement. That means vacancies grew slightly. “But we’re viewing this as a temporary pause in an improving situation,” Emrath says.

Asked why the MPI hasn’t gone higher than it has, Emrath said access to construction lending is one of the factors constraining optimism. The 300,000 to 350,000 units a year the industry has been building is in line with overall demand increase, he says. “We never had a surge like we did in single-family home production, we just had declines from a normal sustainable level in units built. You have people sitting on the sidelines and not forming new households. We haven’t built much, but on the other hand there hasn’t been this household formation. It’s really been a demand-side phenomenon.”

What does the movement of the MPI and MVI mean for the future? Both indexes have functioned as leading indicators, Emrath says. The MPI has typically moved one to three quarters in advance of multifamily starts.

It began noticeably improving after the second quarter of 2009, before multifamily starts bottomed out in fourth quarter of 2009 and began improving in the first quarter of 2010. “We believe starts will continue to grow from this historically depressed level, subject to normal ups and downs,” Emrath says. “Multifamily production tends to be volatile.”