A Rare Setback For Multifamily Developer Confidence

Suddenly, there’s less confidence in the multifamily housing sector—long-time regarded as one of the safest and best performing CRE segments.

This is according to the Q1 2022 National Association of Home Builders Multifamily Production Index, which fell six points to 48 compared to the previous quarter, dipping below the break-even mark of 50 for the first time in three quarters.

The MPI measures builder and developer sentiment about current production conditions in the apartment and condo market on a 100-point scale. The index and all of its components are scaled so that a number above 50 indicates that more respondents report conditions are improving than report conditions are getting worse.

Sean Kelly, executive vice president of LNWA in Wilmington, Del., and chairman of NAHB’s Multifamily Council, said in prepared remarks that high construction costs and their impact on affordability are making some developers increasingly cautious.

NAHB Chief Economist Robert Dietz said the decline in the MPI indicates that developers’ caution has not shown up yet in the multifamily starts rate, which remains quite strong, “but the MPI typically leads changes in starts by one to three quarters.”

Key factors in the index include: Construction of low-rent units-apartments that are supported by low-income tax credits or other government subsidy programs; market-rate rental units-apartments that are built to be rented at the price the market will hold; and for-sale units—condominiums.

Its Multifamily Occupancy Index inched down one point to 68.

Demand for This ‘Safe Haven’

Along with this signal of developer concerns, there are small signs  that the larger economic realities are starting to have an impact on this asset class on the margins. 

For example, Kevin Crook, director of acquisitions & dispositions, Investors Management Group, tells GlobeSt.com that some older Class C properties are being affected but that is a small percentage of the overall market. “During the pandemic, we saw many office and retail investors enter the multifamily market by acquiring apartments as a safe haven. 

“Rising interest rates have started to accelerate the business plan of some of those investors, with many of them now looking to sell.”

Rising interest rates are also impacting consumers, which will eventually have an impact on rental rates, Dennis Malloy, commercial lending originator, Commercial Lending, Alliant Credit Union, tells GlobeSt.com.  “Along with so many other sectors of the economy, the multifamily market is reliant upon the consumer. As consumer spending is impacted by rising prices and increasing credit costs, rental rates may be impacted, and the recent growth rates enjoyed by landlords over the last several years may be truncated. 

“That said, housing remains in short supply across the country, and as home ownership costs continue to rise, we expect multifamily to remain a very attractive investment class.”

Economic Forces Forcing People to Rent

Indeed, David Grissom, Managing Partner, Westport Residential, tells GlobeSt.com that the combination of higher interest rates and high home prices will cause more people to continue to rent.

“With the impacts of inflation on household budgets we expect Class B assets to fare well as people strike a balance between having a nice place to live and affordability,” Grissom said. “We see Class C properties having the most softness in the near future.  Households renting Class C apartments are likely to be hurt the most by inflation.”

Drowning Out the ‘Noise’

But these concerns, along with new data points provided by the NAHB index, are short-term signals of what is happening in the multifamily market, says Omar Rihani, vice president and national residential sector lead at Project Management Advisors. 

“While these shorter-term metrics might imply that the market is softening, overall, the major multifamily trend drowns out the noise: the country is still severely underhoused, especially in the three elements this index reports on,” which are low-income, market-rate and for-sale units, he tells GlobeSt.com. 

“There will always be ups and downs in any short-term index, so we bet on the broader horizon, which is that people need housing and the market will meet that demand.”