As a result, contends Richard Moody, chief economist and director of research for Forward Capital LLC, new apartment deliveries will remain low into 2012 and beyond. If this scenario plays out, it's not necessarily bad news for multifamily players, since an improved economy, job growth and demographic shifts will converge to increase the demand for rental housing.
Whereas single-family construction permits, starts and completions peaked in 2005 and 2006 and then trailed-off, apartment developers remained relatively restrained between 1998 and 2008. During this timeframe, slightly more than 300,000 multifamily units were delivered to the market on an annual basis. Permits and starts were on par with that figure. Yet while development remained stable, most of that product consisted of for-sale condominium units, and rental product accounted for a lower share than usual.
The condo crash ended this trend, and the balance shifted to give the rental component more weight. By year-end 2008, the overall number of multifamily units planned or underway had declined significantly, and continued through 2009.
Indeed, just 109,000 multifamily permits--for structures with five units or more--were issued in June, according to the most recent data from the US Census Bureau and US Department of Housing and Urban Development. That's a 16% increase over May's tally of 94,000 units--a record low in terms of permits--and a nearly 80% decrease over June 2008. Meanwhile, 101,000 units were started in June, down nearly 74.8% from the prior 12 months. That's after developers started 143,000 units in May, and just 80,000 units in April--the lowest figure for starts since the government began tracking this activity in 1959. The shift was less drastic for completions. Some 271,000 units were delivered to the market last month, down 14.2% from May 2009, but nearly on par--up 1.1%--with completions in June 2008.
Whether these trends will continue remains to be seen. Moody notes that during the downturns in the mid-1970s and early 1980s, activity declined similarly but picked up quickly once recovery hit. However, in the most recent slowdown of the 1990s, he says, "The slowdown in multifamily construction persisted for roughly two years before giving way to a moderate, and prolonged, rebound."
If construction levels remain low for a longer period, as expected, Moody says, "the result could be considerably tighter conditions in the rental apartment market between 2012 and 2015 than may be imaginable given today's economic and housing market headlines." For current owners of apartment properties, patience will pay off, and for investors with capital, now may be the time to snap up multifamily assets at attractive prices.
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