Major Decline in Apartment Construction

by Landon M. Scott

The Commerce Department released figures showing that new home construction fell to an adjusted 523,000 homes per year. This near-2009 level of home building was led by a major fall in apartment construction, which was down 28%.

Also, per the Associated Press (AP) news wire, “In previous recessions, housing accounted for 15 percent to 20 percent of overall economic growth. In the first post-recession year, between 2009 and 2010, housing contributed 4 percent to the economy.” Here is the link – From The Detroit News:

So, where does that leave us with multifamily assets? On the one hand we have less supply coming onto the market and therefore price support. On the other hand the economic recovery is being held back by a glut of foreclosure in single family assets and therefore depressed home construction – a major driver of recoveries (in the past at least). With a less than stellar recovery incomes, and therefore multifamily rents and asset values, are depressed.

These countervailing forces seem to help explain why apartment buildings tend to exhibit relatively stable CAP rates compared to other commercial real estate asset types; the market for multifamily isn’t great, but it’s not horrible either. Of all the types of income property, multifamily is fairing the best and holding its value. This could also be because large REITs are in the market and are in a hurry to place into service the money they’ve raised in equity markets, but this explanation tends to be true for the larger properties more so than smaller ones not on the radar of Wall Street.

These countervailing forces are to be expected; this supply/demand give and take is exactly what we would expect from properly working markets. But something is going to give and either supply will pick up before demand recovers and prices will fall, or demand will increase and drive up the price of a fixed supply of apartments. Your opinion on which will occur first should be the first question you ask when contemplating an investment in the multifamily sector. Given the steep fall off in construction but green shoots in the broader economy (even if construction is depressed), I’d say a safe bet is that rents will begin to rise faster than inflation (real appreciation) by fall and supply will stay pretty much fixed. This leads me to expect multifmaily to rise in value in the short run.

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