Apartment Starts Will Trend Down After this Year, Held Low by Shadow Inventory, Condo-to-Rental Conversions, Says NAHB Economist

By Keat FoongExecutive EditorWashington, D.C.—Multifamily made news recently by being the housing sector that showed a steep increase in starts. Nevertheless, overall starts for the sector, for both the apartments and condominiums, are expected to decline by next year. Bernard Markstein, senior economist and director of forecasting at the National Association of Home Builders (NAHB), says that the shadow inventory of apartments will be responsible in big part for a decline in apartment starts. “We expect multifamily starts will be trending lower going into next year,” he says. Markstein points out that as of the first quarter, the vacancy rate is still 10.1 percent in the U.S. And although a rising proportion of residents are now going into rentals, a high level of condominiums are still yet to be delivered into the market. It can be assumed that a large portion of these condominiums will be converted to rentals and added to the apartment stock, he says.  The U.S. Department of Commerce reported recently that starts of apartment rentals of five or more units jumped 40.5 percent to 326,000 units in April on a seasonally adjusted basis. This compares with 232,000 apartment units started in March 2008, and 253,000 units during April of last year. Markstein, however, agrees that these multifamily numbers merely reflect the usual volatility of multifamily starts rather than being indicative of a general trend. Also, he says that a number of big projects being started may have been responsible for the big multifamily starts numbers in April. Markstein says that multifamily starts (which include both multifamily rentals and condominiums) have been averaging about 316,000 units in the first quarter. Multifamily starts this year “will be heading down to 300,000 units, and eventually we expect them below 250,000,” he says.NAHB forecasts that total multifamily starts will decrease from 309,000 units in 2007 to 285,000 units this year, and to as low as 221,000 units in 2009. By next year, the condominium share of multifamily construction will be below 20 percent, Markstein indicates, compared to nearly 50 percent a few years ago and a historical norm of closer to 25 percent.As far as rentals, the association forecasts that multifamily rental starts will increase to 225,000 units this year, from 195,000 units in 2007. However, it is forecasting that multifamily rental starts will fall to 185,000 units in 2009.