Multifamily Completions to Peak in 2017

Is the growth in residential development, coupled with decreasing construction costs, a sign that the industry is reaching the top of the current cycle?
Paula Munger, NAA

Paula Munger, NAA

Washington, D.C.—Construction spending in January fell 1 percent to $1.18 trillion compared to $1.19 trillion in December 2016, according to the U.S. Census Bureau. However, residential construction spending grew by 0.5 percent to $476.4 billion, the highest level since August 2007, according to statistics from Trading Economics.

Is the growth in residential development a sign that we are at cycle peak? “Yes, we expect multifamily completions to peak in 2017. We’ve already seen weakness in starts and permits data, meaning that construction will start tapering off in 2018,” Paula Munger, director of industry research and analysis at the National Apartment Association, told Multi-Housing News.

Though multifamily construction is on the rise, many U.S. markets are dealing with a supply shortage. Industry experts attribute the shortage to developers building the same type of assets in the same areas where they are no longer needed. “The luxury segment in urban core markets like New York (and) San Francisco is getting overbuilt as there’s just not enough demand to keep up with the new supply. It’s hard to build an affordable product (increasing labor, material and construction costs, regulations, fees etc.), but that’s where the biggest mismatch is between supply and demand,” Munger added.

construction-spending-jan-2017

However, 2017 will not be a challenging year when it comes to multifamily demand. “The indicators we look at suggest that multifamily demand should continue to be strong in 2017; the age group that traditionally has the highest rentership rate (young adults) still is very large, for example,” Caitlin Walter, director of research for the National Multifamily Housing Council (NMHC), told MHN. The current market conditions and increase of interest rates might impact first-time buyers. “The supply constraints in the single-family housing market—particularly ‘starter’ homes—coupled with increasing mortgage rates will turn away some potential first-time buyers,” Munger explained. While some buyers might pay attention to the Fed’s next move, the same can’t be said about developers. Only a substantial increase would influence their decision to build or not, considering the current low interest environment. “That’s just not expected in 2017,” Munger said.

The multifamily lending market is expected to remain cautious in 2017, though it is not quite clear how selective will lenders become. “Lenders were certainly cautious in 2016 when it came to construction loans, and there was concern about interest rate increases. Our April Quarterly Survey will hopefully shed some more light,” Walter added. NMHC’s last survey on multifamily construction financing in April 2016 showed two-thirds of respondents (excluding those who answered “don’t know”) reported slightly or significantly lower construction financing availability than six months earlier, and almost three quarters of respondents reported less favorable (either slightly or significantly) loan terms than six months earlier.

When it comes to the areas experiencing the most development, core markets are definitely the winners of 2017. “Yes, there has been a shift to core (and) downtown. It will continue in markets with strong job growth, but we’re also seeing development, and will continue to, in ‘close-in’ suburbs with good transit links and a strong amenity base. The walkability factor, no matter the location, has become important to many residents,” Munger told MHN. Walter believes that new multifamily projects will aim to offer a “town center” feel, where mixed-density and/or mixed-use development is the focus. “Rockville, Md. would be a good example,” she said.

Image courtesy of NAA