There’s More Multifamily on the Way

There are changes coming to multifamily that may not seem so desirable in the short run, but which will help stabilize markets and the industry overall.

“Data shows that there are more multifamily than single-family units under construction,” writes Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors. “Specifically, in September, 893,000 units in buildings with five units or more compared to 800,000 single-family units were under construction. Meanwhile, it’s worth noting that the number of single-family units under construction has decreased for the last four straight months. On the other hand, the number of multifamily units under construction has increased for nearly the last couple of years.

According to the analysis, multifamily construction is about 50% higher than pre-pandemic averages. Unfortunately, single-family housing starts before 2020 had already been significantly below what was necessary to accommodate both increased demand, population growth especially among people forming families, and the loss of older obsolete housing that needed replacement. And yet, single-family housing starts are currently 13% below the pre-pandemic levels.

That is for a couple of reasons. Market dynamics and rising mortgage rates have made it increasingly difficult for most people to purchase houses. Developers and builders have scaled back on new housing because they can’t afford to borrow and spend the money up front and then not be able to move units quickly enough to recoup investments and make business plans viable.

Insufficient housing might support high rents in multifamily as well as single-family rentals and build-to-rent developments, but it is bad social policy that will ultimately have terrible effects on the housing industry. People need places to live. A lack of housing that helps increase the danger of homelessness means unnecessary pressure on an economy already in trouble and skyrocketing rents that help contribute to inflationary pressures and, so, the Federal Reserve’s determination to further raise interest rates—and, as a result, commercial financing—to slow the economy.

The completion of the additional multifamily units and more could help with rent increases, according to the NAR. That is, help in the sense of moderating rent increases and perhaps introducing lower rents.

Another reason why multifamily development is important to overall housing is the cost of development, because “high construction costs are reported to be one of the biggest hurdles for builders,” as Evangelou notes. “However, building multifamily homes may help offset some of these costs. In microeconomics, this is primarily due to economies of scale. For instance, most subcontractors may offer a discount when they do one big project instead of two small ones. Moreover, the cost of the lot may also be relatively smaller. Buying a larger lot to build a multifamily home may be less expensive than buying two lots. Additionally, by building ten units on a one-quarter of an acre lot as opposed to one unit, you could economize on the land cost.”

And when it comes to population shifts to the South and West, the ability to efficiently use land for housing becomes more critical.