Multifamily Market Expands as Affordability Contracts

July 19, 2022

As demand for housing increased and the U.S. continued to suffer from a lack of supply, home prices and rents soared higher in 2021. For multifamily units, rents climbed about 12% during the first quarter of 2022, repeating the pattern of 2021, according to the 2022 State of the Nation’s Housing Report from the Joint Center for Housing Studies at Harvard University. Rents for single-family homes rose at a similar rate.

In 25 metro areas, rents climbed more than 20% in the first quarter of 2022 compared to the first quarter of 2021 and in some markets, rents rose as much as 42%. Higher rents are widespread throughout the country. The number of occupied apartments reached approximately 713,000 units in 2021, more than double the new completions of 349,000 rental units for the year.

Vacancy rates dropped dramatically to 5.6% in late 2021, the lowest quarterly reading since 1984, and remained low at 5.8% in the first quarter of 2022. Even in urban markets where demand declined in the early months of the pandemic, vacancy rates have now dipped below pre-pandemic rates.

Household growth, which was pushed higher by the strong job market and wage increases, is the main driver of rental demand.

Rental property prices reached a 20-year high in early 2022, growing 22.5% year-over-year and pushing cap rates to a new low of 3.9%. Investors are attracted by the strong performance of the multifamily sector, with total quarterly transaction volumes setting a new record of $96.5 billion in the fourth quarter of 2021.

Supply increasing but affordability lagging

While multifamily construction starts are up to a 30-year high, the bigger story, according to JCHS researchers, is that the largest number of multifamily units are under construction since the 1970s. However, higher costs for materials and labor make it extremely difficult to produce affordable housing of any kind.

The pressure on home prices, along with rapid increases in mortgage rates, mean that about four million renters are now priced out of homeownership, which adds to rental demand.

A rising number of renters face financial hardship, with 15% of renter households reporting that they were behind on their rent in early 2022. Lower-income renters were four times as likely to be behind on their rent compared to renters with a household income of $75,000 or more.

The Harvard study found that 46% of renters are considered at least moderately cost-burdened, meaning they spent 30% or more of their income on their housing payment, and 24% of renters are considered severely cost-burdened, paying 50% or more of their income in rent.

Bipartisan agreement could ease constraints on multifamily development

During a panel discussion about the report’s findings, participants identified policy changes that could help ease the strain of the shortfall of 3.8 million housing units in the U.S., according to an estimate by Freddie Mac.

Ryan Marshall, president and CEO of PulteGroup, said that land use policies need to be changed at the state and local level. He suggested that when states receive federal funds for development, there should be a quid pro quo that those state and local jurisdictions must to have friendlier policies to allow for building more homes. For example, in Massachusetts, municipalities with public transportation must set aside 50 acres of land that is zoned for moderate density multifamily housing, said Chris Herbert, managing director of the JCHS.

Alanna McCargo, president of Ginnie Mae, pointed to the multifamily risk sharing program that has funneled new money through HUD and state housing finance agencies to provide additional gap financing and funding for the development of affordable multifamily housing.

Pointing to the success of emergency rental assistance programs during the pandemic, Sarah Saadian, senior vice president of public policy for the National Low Income Housing Coalition, said that the bipartisan Eviction Crisis Act could provide $3 billion annually in rental assistance if passed.

“Emergency rental assistance benefited tenants and landlords and their communities during the pandemic,” said Herbert. “We need to broaden the definition of who benefits from programs like this to increase support for them.”

Herbert also pointed out that there’s broad bipartisan support for reducing regulations in the housing industry, such as allowing for higher density.

“People on the left and the right who care about housing agree that there are regulatory barriers that need to be addressed to increase affordable housing,” Herbert.