Rental Market Continues to Strengthen

June 6, 2013

The most recent data from the Survey of Market Absorption of Apartments (SOMA) showed that completions of privately financed, nonsubsidized, unfurnished rental apartments continued to climb in the fourth quarter of 2012. The reported 31,600 completions in buildings with 5+ units were slightly above the third quarter level and more than doubled since the fourth quarter of 2011. At the same time, the absorption rates (units rented or sold after construction of the property is complete) remained high, close to 65 percent. Averaged over 2012, the apartment absorption rates reached 64 percent, a level not seen since 2001.


The condo and co-ops completions remained at historically low levels – only 1,800 units were completed in the fourth quarter of 2012. However, the condo absorption rates improved remarkably. About 78 percent of the condominiums completed in the fourth quarter of 2012 were sold within three months of completions. This rate is 20 percent higher from the previous quarter and 33 percent higher from a year ago.  Over 2012 the condo absorption rates have averaged around 66 percent, marking the highest reading since 2006. Leaner inventories should bolster condo and co-op construction activity going forward, but we expect these units will maintain a diminished share of overall 5+ multifamily production.


The SOMA also reported that approximately 8,100 federally subsidized or tax credit units were completed in the fourth quarter of 2012. This represents a decline of 3,400 units since the previous quarter and 4,100 since a year ago.


Apartment Production Spikes to an Unsustainable Rate

April 17, 2013

The Census Bureau’s preliminary estimate for starts in buildings with five or more apartments in March came in at a massive (seasonally adjusted annual) rate of 392,000 units.  In the Census construction report, this shows up as a 27 percent increase over February.  However, the number for February was itself revised upward by 24,000—so the five-plus starts rate for March is actually 38 percent higher than the production rate we thought prevailed a month ago.

MF Starts through March

At 392,000, the five-plus starts rate is the highest it’s been since January of 2006 (a one-month anomaly that at the time was explainable as the industry’s response to changing building codes in some states).  Even if we smooth some of the volatility out of the five-plus starts series, the 3-month moving average is up to 325,000.  That’s above the annual number of five-plus starts in any year since the 1980s, so even the current moving average seems a bit too high to sustain going forward—a contention supported by the permit numbers in the latest construction report.

The report shows that, in March, the (seasonally adjusted annual) rate at which new five-plus permits were issued dropped 8 percent to 283,000, while the number of five-plus permits waiting in the pipeline (previously issued but not yet converted to starts at the end of the month) declined 19 percent, to 38,400 (not seasonally adjusted).

Residential Construction Spending Bounces Back in February

April 1, 2013

After three consecutive months of slight declines, private residential construction spending increased 2.2% on a month-to-month basis in February. Despite the sluggish readings from the prior 3 months, nominal spending on residential construction activity remained more than 20% above its year-ago level and roughly 36% higher than the cyclical low in mid-2011.

The new single-family home category continued to show strength in February, gaining 4.3% versus January. Compared to February 2012, spending on new single-family homes has risen 34%, but perhaps more importantly, the level of nominal construction spending has surged more than 73% since bottoming out in mid-2009. Spending activity will likely expand further over the next two years as the current NAHB forecast calls for single-family housing starts to increase 23% and 29%, respectively, this year and next.

construction spending

The multifamily sector took a step back in February, with spending on new multifamily projects slipping 2.2% from January. In fact, this marks the first outright month-to-month decline for this category since September 2011. Still, the overall trend remains decidedly positive for new multifamily construction activity as the level of spending is 52% ahead of the pace in February 2012 and has more than doubled the August 2010 low point. After a likely modest retrenchment in the first quarter of 2013, the baseline forecast calls for consistent gains in multifamily starts through the end of 2014.

Home improvement spending improved slightly in February, gaining 0.5% versus the previous month and is 1.1% above the level from last year. Although this construction spending category is the most volatile and likely to be revised, the 3-month moving average suggests spending on remodeling activity has cooled over the past several months. Nonetheless, with existing home sales expected to register steady growth going forward, home improvement activity should see a similar pattern as sellers spruce up their homes for sale and/or buyers decide to make changes after they move into the home.

Multifamily Rental Properties: Would You Believe 2.25 Million?

March 29, 2013

According to a new survey sponsored by HUD and conducted by Census Bureau, there are 2.25 million multifamily rental properties in the U.S.  You may wonder if we really needed a new survey to tell us this.  The short answer is yes.


In the decennial Census and virtually all surveys of housing, the government goes to housing units and starts by asking questions of the occupants.  You can count most single-family properties this way, but not multifamily properties that, by definition, have more than one unit per property.

To fill the information gap, NAHB has been a strong advocate of something like the new Rental Housing Finance Survey (RHFS).   One advantage of the RHFS is that it goes to property owners and mangagers, and therefore can collect information about items like upkeep and financing that tenants of rental apartments typically don’t know.  But one of the reasons NAHB has long been advocating a property-level survey like this is simply to get very basic information on counts of buildings and properties.

According to the RHFS, the lion’s share of the 2.25 million multifamily rental properties in the U.S.—1.64 million—consist of a single apartment building.  There are, of course, properties with more than one building—nearly 100,000 properties have 20 or more.  On average, multifamily rental properties turn out to have 2.5 buildings, so the total number of multifamily rental buildings in the U.S. works out to 5.6 million.


A lot of the 2.25 million properties would be classified as small by most standards.  Over 1.4 million of them are valued by their owners at less than $500,000.  About 850,000 are even valued at less than $200,000.  Although a little over 6 percent of owners failed to report the current market value of their properties to the RHFS, that still leaves more than 2.1 million multifamily properties, and they have a total market value that adds up to roughly $3.8 trillion.

For readers who like more infomation, the Census Bureau has a number of additional statistics in tables posted on its RHFS website.  NAHB is also in the process of analyzing the new multifmaily rental data and will feature it in upcoming blogs.

Multifamily Starts: A Little Stronger than We Thought Last Month

March 21, 2013

For February of 2013, the Census Bureau’s preliminary estimate for starts in buildings with five or more apartments came in at 285,000  (at a seasonally adjusted annual rate).  In the Census construction report, this shows up as less than a 1 percent increase from January, but the January number itself was revised upward by nearly 9 percent—so 285,000 is  actually 9.6 percent higher than the preliminary starts rate for January originally reported in last month’s blog.

Feb 2013 MF Starts

Although well below the anomalous spike of December, the February 2013 five-plus starts rate appears strong compared to any other month from recent history (the same general pattern seen in total housing starts).

Another interesting statistic in the February 2013 construction report was the (seasonally adjusted annual) rate at which new five-plus permits were issued during the month.  The new five-plus permit rate increased  7.5 percent to 316,000—which at first may not seem terribly dramatic, but is up nearly 55 percent year-over-year and the highest the five-plus permit rate has been since July of 2008.

The number of unused previously issued five-plus permits remaining in the pipeline at the end of the month also remained relatively healthy at 47,700 (not seasonally adjusted)—up 2.7 percent from January and 46.4 percent year-over-year.  Overall, the permit numbers have been strong enough to support a five-plus starts rate as high as February’s 285,000 over the next couple of months.

Multifamily Production Index Shows More Improvement

March 13, 2013

In the fourth quarter of 2012, NAHB’s Multifamily Production Index (MPI) increased two points to 54, marking the fourth straight quarter the index has been over the key break-even point of 50.  The MPI is an overall measure of builder and developer sentiment on current conditions in the apartment and condominium market.

The MPI is built from three components, capturing industry sentiment on production of low-rent, market-rate rental, and “for-sale” units (or condominiums). Each component lies on a scale of 0 to 100, where a number over 50 means more builders say conditions are improving than say they are getting worse.  The MPI typically functions as a leading indicator, turning one to three quarters ahead of the official series on multifamily starts.  After the latest downturn, for example, the zigzagging upward trend in the MPI began about three quarters before a similar pattern emerged in the starts series.

MPI 12 Q4

Although the MPI’s market-rate rental component dropped four points in the fourth quarter, it still remains well above the break-even point at 65.  Moreover, the market-rate rental component has now been above 60 for six consecutive quarters—the longest sustained period above 60 since NAHB launched its multifamily survey in 2003.

Meanwhile, the MPI’s condo component reached its highest point since the fourth quarter of 2005, increasing two points to 46, while the low-rent component increased seven points to 53.

The MPI is one of two major sentiment indices produced from NAHB’s quarterly multifamily survey.  The other is the  Multifamily Vacancy Index (MVI), which recently has shown ongoing strength in demand for existing apartments and is one of the reasons NAHB expects multifamily production to remain fairly strong.

However, builders and developers are starting to encounter constraints to their ability to keep up with increased demand—particularly emerging shortages and rising costs of building materials, labor and land.

A complete history of the MPI and each of its components is available on NAHB’s web page for the multifamily market survey.

Multifamily Vacancy Index Stays in the Low 30s

March 8, 2013

In the fourth quarter of 2012, NAHB’s Multifamily Vacancy Index (MVI), which measures property owners’ confidence in the strength of the market for existing rental apartments, improved slightly—falling two points to 31. Because the MVI captures the industry’s sentiment about apartment vacancies, lower numbers are better.

After peaking at 70 in the second quarter of 2009, the MVI declined consistently through 2010 and has remained at a fairly low level in the low to mid 30s throughout 2011 and 2012.  So, in this respect, the fourth quarter gave us more of the same.

Historically, the MVI has tended to foreshadow the Census Bureau’s measure of rental vacancies in buildings with 5 or more apartments.  When conditions are changing, the MVI generally turns at least one quarter before the 5+ vacancy rate.MVI 12 Q4

Recently, both measures have been edging downward.  At 31, the MVI is currently as low as it’s been since NAHB initiated the survey in 2003, while the 5+ vacancy rate has dipped below 9 for the first time since 2000.

The MVI is one of two main sentiment indices produced from NAHB’s quarterly survey of multifamily developers, property owners, and managers; the other being the Multifamily Production Index (MPI). For more information, including a complete history for both indices and all of their components, see NAHB’s web page for the MPI & MVI.

Apartment Construction Continues to Improve

March 8, 2013

Completions of unfurnished apartments for rent or sale in 5+ unit properties climbed to more than 30,000 units during the third quarter of 2012, a 20% increase versus the third quarter of 2011. The Survey of Market Absorption of Apartments (SOMA) tracks completions and market absorption rates (units rented or sold after construction of the property is complete) for apartments sold or rented in 5+ unit properties. The three-month absorption rate of unfurnished apartments declined during the fourth quarter of 2012, slipping four percentage points to 64%. The absorption rate has averaged just above 60% during the last four quarters.


Absorption rates for condo and co-op units have improved compared to the numbers observed in the post-bubble aftermath. For those units completed during the third quarter and sold during the fourth quarter of 2012, the 3-month absorption rate dropped to 57% (from 66%), which is identical to the rate averaged over the past four quarters. Even though absorption rates have trended higher from their cyclical lows, the volume of condos and co-ops being built and sold remains incredibly weak. During the third quarter of 2012, a total of 1,700 condos and co-ops were completed—29% below year-ago levels. Moreover, completions are down 94% compared to the peak levels observed at the end of 2006. The forecast calls for condo/co-op construction to continue rising, but we expect their share of overall multifamily housing production to see only modest increases going forward.


The SOMA data also enable one to drill down further into other types of multifamily units completed in a particular quarter. Nearly 12,000 units tied to affordable housing programs such as the Low-Income Housing Tax Credit (LIHTC) were completed during the third quarter, a 9.2% improvement from the prior year. Overall, LIHTC and other affordable housing program apartments accounted for nearly a quarter of all completed units in the third quarter of 2012.


Multifamily Production Falls Back to November Rate

February 21, 2013

The Census Bureau’s preliminary estimate of starts in buildings with five or more apartments for January came in at 260,000 (at a seasonally adjusted  annual rate).  As predicted in last month’s post, a rate well in excess of 300,000 proved too high to sustain.  In fact, the five-plus starts rate for December was revised upward, from 330,000 to 352,000—so the preliminary estimate for January shows up as a 26 percent decline, dropping the five-plus starts rate back to where it was in November.  Month to month fluctuations on this order of magnitude are not unusual in the multifamily construction series, however.

5-Plus Jan

On a year-over-year basis, five-plus starts were still up 35 percent, reflecting the generally upward trend in multifamily production that has prevailed since the end of 2010.

Meanwhile, the rate at which new five-plus permits were issued remained relatively stable in January, increasing 1 percent to 311,000—the third straight month the five-plus permit rate has been slightly above 300,000.  The rate of new five-plus permits usually runs a little above the rate of new five-plus starts (partly because of the Census Bureau’s tendency to reclassify some units considered multifamily by local permitting offices as single-family attached).  Nevertheless, the five-plus permit numbers in recent construction reports have been strong enough to suggest that a five-plus starts rate at slightly above 260,000 is sustainable over the short run.

NAHB MVI Indicates Healthy, Stable Market for Existing Rental Apartments

December 12, 2012

In the third quarter of 2012, NAHB’s Multifamily Vacancy Index (MVI) improved 3 points to 33, largely offsetting the previous quarter’s 5 point swing in the other direction.  The MVI is a measure of property owners’ sentiment about vacancies in existing rental apartments, so lower numbers are better.

MVI 12Q3After hitting a record high of 70 in the second quarter of 2009, the MVI began to improve consistently, until dropping to 33 at the end of 2010.  For the past two years, the MVI has remained fairly stable in the low-to-mid 30s, which is as low as the vacancy index has ever been (the data go back to 2003).

When conditions are changing, the MVI generally turns at least one quarter before the Census Bureau’s hard measure of rental vacancies.  In 2009, improvement in the Census rate of vacancies in buildings with at least 5 apartments began one quarter after the MVI and was much more gradual.  Since then, the 5+ rental vacancy rate has continued its gradual drift downward, and at 9.1 is now as low it’s been since 2000.

With both the MVI and 5+ vacancy rate currently at healthy levels, there’s no strong reason to suspect either will change drastically in the near future.

The MVI is one of two main sentiment indices produced from NAHB’s quarterly survey of multifamily developers, property owners, and managers; the other being the Multifamily Production Index (MPI).  For more information, including a complete history for both indices and all of their components, see NAHB’s web page for the MPI & MVI.