“When one door closes, another opens,” Alexander Graham Bell said. Sometimes, however, we look so long and regretfully upon the closed door that we may miss the ones that are opening.
While the protracted recession has slammed the door on new single-family home construction business—which makes up about 70 percent of the home building market—there is a light over the threshold in multifamily residential housing.
“Multifamily construction continues to be the bright spot in the overall housing market,” said David Crowe, chief economist of the National Association of Home Builders, Washington, D.C.
While household formations have been below trend, those who form them are frequently becoming renters. Recent sharp increases provide evidence of this trend, which Crowe and electrical contracting industry experts say is likely to continue until the job market and consumer confidence returns.
Apartments quicken market pulse
Several indicators are showing signs of growth in the multifamily housing segment, and all appear to be gaining momentum. In particular, the bulk of the construction and the power behind the observed increases lies with the apartment segment. According to Crowe, a large driver of what he described as the “pent-up” demand for apartment stock is a direct result of the recession’s effect on young first-time buyers.
“We estimate there’s about 2 million households that did not form under normal circumstances since 2005. Typical household formations come from people getting jobs and moving out of their parent’s home after graduation or splitting up roommate situations,” Crowe said.
That traffic, however, has slowed down, and the typical household creators have instead morphed into renters by financial necessity.
The rental apartment market may be getting even healthier. Employers expect to hire 13.5 percent more new college graduates from the class of 2011 than they hired from the class of 2010, according to a new study conducted by the National Association of Colleges and Employers, Bethlehem, Pa.
Dan Bollin, president of Transtar Corp., Toledo, Ohio, reported positive signs of local multifamily residential growth spurred by demand from a younger demographic and stepped-up government financing. Still, Bollin firmly believes the job outlook in any market is the key driver behind housing transitions and new construction. In Toledo, expansion of Chrysler and GM plants is making multifamily housing projects more feasible.
“When people go back to work and feel more comfortable going out and spending money, we’ll see more improvement,” Crowe said.
Bollin’s firm completed electrical construction on a 140-unit complex last November and is in the process of wrapping up installations for a 60-unit complex with near-term plans for an expansion phase.
“It seems like the apartment business is stabilizing right now, and hopefully, the single-family homes will stabilize after this,” Bollin said.
Economists, however, caution to keep growth in perspective. They warn that more apartment construction won’t significantly reduce unemployment or signal the long-awaited end to the housing collapse. Nevertheless, multifamily had justifiable growth even though it is climbing out of severely low levels. In 2005, the NAHB reported that nearly 260,000 apartments were built. Last year, approximately 145,000 apartments were constructed—the lowest total since the early 1990s.
The Census Bureau’s January 2012 preliminary estimate for starts in buildings with five or more apartment units in January of 2012 came in at 175,000 (on a seasonally adjusted basis). This figure is up 14 percent from the revised rate for December. The Census Bureau’s preliminary estimate of total starts in five-plus units in 2011 was 167,000, which was up 60 percent from 2010. The NAHB had forecasted a 65 percent improvement in starts of five-plus units, to a total of 165,000 apartments in 2011, followed by a further increase to 190,000 in 2012.
In the third quarter of 2011, NAHB’s Multifamily Production Index (MPI) improved for the fifth consecutive quarter. The MPI, which is based on a quarterly survey of multifamily builders and developers, tracks sentiment about construction of new apartments on a scale of 0 to 100. The MPI increased from 44.4 in the second quarter to 47.3 in the third quarter. It is the highest reading of the index since the fourth quarter of 2005.
The MPI is a composite measure of construction in three key elements of the multifamily housing market: low-rent apartments, market-rate rental apartments and for-sale units (condominiums). The index and all of its components are scaled to indicate that any number over 50 represents that more respondents are reporting improving conditions than report worsening conditions. In the third quarter of 2011, the MPI component, tracking builder and developer perceptions of market-rate rental properties, recorded an all-time high of 63.8. Low-rent units remained steady at 50.1. For-sale units rose to 31.9, the highest recording since the second quarter of 2006.
“The renewed optimism evident in this index indicates that developers are beginning to increase production in order to meet pent-up demand,” NAHB’s Crowe said.
Additionally, new-home construction and building permits surged before the holidays. The Commerce Department reported that builders broke ground on more homes in November, a 9.3 percent increase over October, reaching the highest level since April 2010. Year-over-year, new-home starts were up 24.3 percent in November. November’s increase was mostly driven by construction of multifamily homes with at least two units, which soared 25.3 percent. Single-family homes increased only 2.3 percent for the month.
Location, location, location
The number of improving housing markets continued to expand for a fourth consecutive month last December, rising from 30 to 41 on the latest NAHB Improving Markets Index (IMI). The December list featured 20 new additions, including several major markets, such as Washington, D.C.; San Jose, Calif.; and Toledo.
“The increases we continue to see in the number and geographic diversity of improving metros are quite encouraging and evidence of the fact that all housing markets are dependent on uniquely local factors,” said Bob Nielsen, NAHB Chairman.
The general health of a metropolitan area’s housing market eventually translates into improvement in the multifamily segment.
“Apartments and condominiums play an integral role in the overall housing market now more than ever,” said Stillman Knight, chairman of the NAHB’s Multifamily Council Board of Trustees and president and CEO of the Knight Co., Alexandria, Va. “The construction of these units not only brings jobs to local communities but also provides an adequate stock of housing for areas with rapid population growth.”
The nation’s capital is one of the hottest multifamily residential areas in the country right now. Apartment builders are eyeing a market with relatively stable jobs in a region that they say has become more attractive to young professionals.
The Washington Post recently reported that Delta Associates, a research and consulting firm based in Alexandria, dubbed the nation’s capital “the best performing apartment market in the nation” due to the available jobs, a low vacancy rate and a construction drought.
Delta projects that more than 1,200 units are expected to be completed in the 12 months ending June 2012, an increase of 47 percent from last year. The projected increase in Northern Virginia alone is approximately 16 percent. Local market analysts see the turn away from home ownership in the area as being boosted by the newest generation of renters who are in their 20s and 30s and are putting a premium on location.
Contractors gain from local trends
Traditional funding sources for new multifamily residential construction have been constrained.
“Local banks are not in a position to go out and make loans. They’re more concerned about bringing in the money that they’ve loaned out so they can get their balance sheets balanced out to pay back TARP money,” Transtar’s Bollin said.
Bollin went on to say most of the recent projects are being subsidized by government agencies such as the Federal Housing Administration (FHA). According to the Department of Housing and Urban Development, the scope of the FHA’s mult-ifamily business for the 2011 fiscal year that ended on Sept. 30 showed that the FHA endorsed 1,303 mortgages totaling $12.5 billion and 187,407 units. That’s up from an investment of $10.3 billion in 2010 and $3 billion in 2009. In turn, this mortgage volume stimulated the creation of 54,525 private sector jobs in the construction, property management and service sectors.
The FHA’s insurance programs, along with Government National Mortgage Association (Ginnie Mae) securities, supported the development of much needed affordable and working force housing in the absence of other sources of private capital. And, the agency plans to be a relevant force in the multifamily sector in the near term.
“There will always be an important need for safe and decent multifamily rental housing for families where homeownership is not the answer. We believe there’s still additional capacity in certain markets where we can ensure strong neighborhoods and support the development and preservation of affordable multifamily rental housing,” said Marie Head, the FHA’s deputy assistant secretary for Multifamily Housing Programs.
Throughout the recession, Bollin said Transtar has continued to provide multifamily residential electrical services, such as cable television, data and phone work, but he is noticing an interest from owners wanting to secure their new investments. There has been an uptick in the requests for security systems, most notably in upper end units.
“Security system prices are coming down, and after finishing a 50-unit subsidized project, we were called back out to install alarms,” he said.
Despite the additional work and optimism, Bollin is keeping a watchful eye on his firm’s ability to turn a profit on the projects.
“One of the biggest issues we’re facing today is the cost of materials. They’ve continually risen, and the competition doesn’t allow you to raise your price. It affects the bottom line,” Bollin said.
Still, he recognizes a new door has opened, and he feels fortunate to have the opportunity to walk through it.
MCCLUNG, owner of Woodland Communications, is a construction writer from Iowa. She can be reached at email@example.com.