Multifamily Market on the Upswing

"There's a pent up demand with the younger generation for housing," said Lance Swank, COO at The Sterling Group in Mishawaka, Ind. "That's where the money is going.
Courtesy of Larry Shield

The multifamily market has recovered substantially since the end of 2010, and now stands at about 70 percent of the way back to a sustainable level. Now that the single-family market is starting to make its turnaround, will that hurt the multifamily market? Is there a multifamily bubble on the horizon? Industry experts discussed these topics at the National Association of Home Builders' Show in Las Vegas on Jan. 22.

"In the housing industry, multifamily units have had a much stronger recovery than other sectors," said Sharon Dworkin Bell, senior vice president for multifamily and 50+ housing at NAHB. "Developers are building lots of apartments and there's a demand for more. Between Fannie Mae and Freddie Mac, there doesn't seem to be enough financing available to satisfy the needs."

David Crowe, chief economist at NAHB said during the building boom the industry averaged about 1.4 million units per year, but it fell to only 500,000 units during the collapse. There's still pent-up demand and employment still needs to improve.

"We've been looking at triggers of home formation and have targeted the 25 to 34-year old demographic and this group will form more independent households," said Crowe. "We've got 75 million home owners in this country, but not everyone has pristine credit yet. We continue to have tight writing conditions."

Eventually renters will become home owners and the Echo Boomers (children of the Baby Boomers) will grow into the prime formation rate, said Crowe. Between 30 to 34 percent of the single family homes are on the rental market.

The multifamily builder index has been above 50 for the third straight quarter, which has a predictive quality, according to Crowe. It ended at 52 for the fourth quarter of 2012, which meant 52 percent of respondents were optimistic about the future of the multi family housing industry.

From 2011 to 2012 the amount of multi family units constructed increased 38 percent to 246,000. Crowe said he expected a 22 percent this year and 6 percent next year to end at 314,000 in 2014.

"Although we have a fragile economy, the upside is that it's an improving economy," said Crowe.

Said Michael Costa, president/CEO, Highridge Costa Housing Partners in Gardena, Calif.: "We're seeing a golden age for multi family units. Every year between 100,000 and 150,000 units are taken out of service and they need to be replaced. Up to 6 million units could be constructed in the next decade. If we're wise, then we'll avoid over-saturating the markets."

It can be difficult to find construction financing, said Costa. This can create constraints on meeting demands. In the urban core, the design trends have been towards smaller units. Transient movement in several states will continue to accelerate. It's becoming more and more desirable to build multifamily units.

"We're behind the demand for affordable housing," said Lance Swank, COO at The Sterling Group in Mishawaka, Ind. "We now target households that make 35, 40 or 50 percent of the national median, because of the huge need for housing."

In the past it was tough to build five to eight units at a site if the developer didn't know if the community was going to stay there, said Swank. Now other companies can go in and tie up the site with affordable housing. America pulled back on the affordable housing program due to fiscal uncertainty.

"We need to focus on suburban garden style apartments," said Dworkin Bell. "Residents have been getting used to living in smaller apartments and the units need to get even smaller. People move to where they can afford to live."

Crowe said during the building downturn that this country lost its capacity to produce an excessive amount of building materials. Companies are resistant to go back to pre-recession production until those products can be absorbed. Production isn't up to its capacity yet.

"There's a pent up demand with the younger generation for housing," said Swank. "That's where the money is going. We're going to see two or three-story garden style apartments. Once the job market rebounds, it's likely people will first rent, then buy homes."