While the multifamily property sector fared better than expected in 2020, economists at the National Association of Home Builders (NAHB) anticipate that regulatory issues, supply-side challenges, slowing rent growth and rising vacancy rates will weaken construction in the sector in 2021. Multifamily development should stabilize in 2022, according to analysis by Robert Dietz, chief economist for NAHB and Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis for NAHB. Both economists presented their findings at the 2021 NAHB virtual International Builders’ Show.
"Though the multifamily sector is performing much better than nonresidential construction, developers are facing stiff headwinds in 2021," said Dietz. "Shortages and delays in obtaining building materials, rising lumber and OSB prices, labor shortages and a more ominous regulatory climate will aggravate affordability woes and delay delivery times."
Generally, employment metrics have the most direct impact on the multifamily sector. Dietz said that unemployment peaked at around 20% in the spring of 2020 and has since come down to about 10%. He anticipates that unemployment will decline to 5% by the end of 2021 and will decline further in 2022. In addition, his GDP forecast is for an increase of 3.6% in 2021 and an additional rise of 4% in 2022.
“The economy has more energy than we expected already, so we may do upward revisions in the coming months especially as the COVID-19 vaccine is deployed,” Dietz said.
Multifamily starts in 2021 are expected to fall to 349,000 units, down from a projected total of 392,000 in 2020, an 11% decline year-over-year. However, NAHB predicts that in 2022, multifamily production will increase by 5% over 2021 up to 365,000 units.
Construction of multifamily buildings has increased in the past year in less dense, lower cost markets, part of the migration trend of businesses and people to those areas. Thirty-four percent of total multifamily construction in 2020 was in those markets.
"These areas have outpaced higher density markets over the past four quarters, and we anticipate the trend will continue this year," said Dietz.
Uneven Regional Performance
The top 20 markets with highest growth in multifamily construction permits between November 2019 and November 2020 are primarily in less dense locations such as smaller cities or suburban areas, said Nanayakkara-Skillington. Those 20 markets include Jackson, Miss.; Mankato-North Mankato, Minn.; Mount Vernon-Anacortes, Wash.; Abilene, Texas; Yuma, Ariz.; Beaumont-Port Arthur, Texas; Dubuque, Iowa; Topeka, Kan.; Columbia, Mo.; Brownsville-Harlingen, Texas; Amarillo, Texas; Norwich-New London, Conn.; Blacksburg-Christiansburg-Radford, Va.; Akron, Ohio; Brunswick, Ga.; Glens Falls, N.Y.; Scranton-Wilkes-Barre-Hazleton, Pa.; Appleton, Wis.; Pocatello, Idaho; and Barnstable Town, Mass.
Among the largest multifamily markets, the number of permits declined in six of the top 10 markets from November 2019 to November 2020. The sharpest decline in permits was 46% in the Dallas-Fort Worth market. The New York-Newark-Jersey City region, which is the largest in the nation by number of units, saw a 14% drop in permits. Other markets with a decline in multifamily permits year-over-year include Seattle (down 22%), Los Angeles (down 16%), Minneapolis (down 12%) and Houston (down 10%).
On the flip side, multifamily permits were up 54% year-over-year in Austin, which is the second largest multifamily market in the nation by number of units. Permits were also up in Nashville by 43%, Phoenix by 32% and Miami-Fort Lauderdale-West Palm Beach by 3%.
Supply of New High-Density Buildings Expected to Decline
Nanayakkara-Skillington analyzed the pattern of the number of units in new multifamily buildings and found that buildings with 50 or more units consistently represent the largest share of those constructed in every year from 2014 through 2019. However, she anticipates that share to decline in 2021 and beyond, with lower density buildings gaining favor among renters and developers.
“A potential growth opportunity for developers could be in smaller two-to-four-unit buildings,” said Nanayakkara-Skillington.
“The number of starts for two-to-four-unit buildings peaked in 2006 at about 40,000 units per year and declined until 2018, when they began rising again to approximately 12,000 units annually,” she said. “Starts continued to rise in 2019 and 2020 for those smaller buildings, but they don’t come close to meeting the demand for what we call ‘missing middle’ housing for middle-income renters.”
Despite the pandemic’s pressure on vacancy rates and rent growth, the multifamily sector is poised to rebound in 2022 and has already strengthened in many lower cost markets.