Multi-Housing Fundamentals Looking Shaky, Says McGraw Hill Economist

By Anuradha Kher, Online News EditorNew York–Overall construction starts are down 15 percent as the construction industry continues to face divergent forces in 2009, according to the McGraw-Hill Construction 2009 Outlook Spring update. The economy weakened substantially, and despite all the efforts and money directed at thawing frozen credit markets last fall, there’s been little sign of any positive impact, the report finds. While steps proposed by the Obama administration in March to deal with the troubled banking system were favorably received by the financial markets, their implementation will require time and their degree of success is uncertain, especially for the near term. Along with all other real estate sectors, the multifamily industry is also feeling the pinch. In 2008, multi-housing starts dropped 32 percent to 307,000 units, much steeper than what occurred in 2006 (down 3 percent) and 2007 (down 12 percent). The overbuilt condominium segment of multifamily housing has been in the midst of a correction for some time now, and 2008 showed large declines in such condo-dominated markets in Miami (down 59 percent) and Las Vegas (down 57 percent). “The only strength for multifamily right now are perhaps the markets which did not experience the boom,” Robert Murray, chief economist, McGraw-Hill Construction, tells MHN. “But otherwise, there is widespread decline in this sector as well.” New York, the largest market for multifamily construction in the nation, retreated a comparatively modest 6 percent in 2008, as its level of apartment construction stayed strong. However, given last fall’s upheaval in the financial sector, multifamily housing in New York will experience a sharper decline in 2009. “Demand for residential buildings has fallen and we will see a severe pullback in 2009 and 2010 in this city,” adds Murray. Tight lending standards have made it increasingly difficult to obtain financing for multifamily projects nationwide, while the deepening recession and declining employment have reduced demand. “I can’t single out any single source of financing that is active right now, other than FHA. There are some private sources, but it is extremely difficult. Till now, the fundamentals of the multifamily industry were strong, but are now declining as unemployment increases.”According to Murray, correction is needed but unless the credit market and the employment situation improves, things will be tough for the multi-housing sector. “At the earliest that is likely to be 2010,” he says.  For 2009, multifamily housing is forecast to fall an additional 33 percent to 205,000 units, according to McGraw Hill. The extent of the deterioration in this market comes through clearly in the growing number of projects that are being put on hold. The most dramatic example is the Chicago Spire, which started in 2007 and at 150 stories was expected to be the tallest building in North America. Construction was suspended in October 2008 when the developer was unable to secure the additional financing to finish the project. Some help for multifamily housing may come from the $4 billion allocated to the Department of Housing and Urban Development’s public housing capital fund, but the benefits are not expected to be reflected at the construction site until 2010 and beyond.“The multihousing sector was very important in shaping the housing industry mid-decade, but we will not see the kind of volumes of multifamily construction we saw three years ago anytime soon,” says Murray. “The projects that are likely to do well in the short-term are garden-style apartments and smaller projects,” predicts Murray.