Q3 2016: Multifamily Construction on the Rise

This article was originally published on ALEX Chatter: Q3 2016: Multifamily Construction on the Rise.

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The U.S. Census Bureau and the Department of Housing and Urban Development recently released new data on residential construction, including data for multifamily buildings (classified as structures with five or more units). All data is seasonally adjusted at an annual rate. 

Building Permits

Total privately-owned residential housing units were authorized by building permits in the United States at a rate of 1,229,000 in October, an increase of 28,000 (2.3%) from the year-end 2015 rate of 1,201,000.

Permits for units in multifamily structures were at a 439,000 rate in October, up 11,000 (2.6%) from the end of 2015, and represented 36% of the total residential permits issued. The multifamily rate for 2015 was the highest year-end level since reaching 614,000 in 1986.

For 2015, the states with the highest multifamily permits as a percent of total residential permits were the District of Columbia (92.6%), New York (83.3%), New Jersey (62.3%), Connecticut (57.5%), and Massachusetts (55.8%).

Housing Starts

Total housing starts were at a 1,323,000 rate in October, an increase of 163,000 (14.1%) from the 2015 year-end total.

Housing starts in multifamily buildings were 445,000, up 67,000 (17.7%) from the end of 2015, and represented 34% of total residential starts. The 2015 total was the highest year-end rate since 381,000 at the end of 2003.

Total residential housing units authorized, but not started, were at rate of 129,000 at the end of October, down from 149,000 (-13.4%) at the end of 2015, including 62,000 in multifamily structures, down from 80,000 (-22.5%).

Housing Completions

Total housing completions were at a rate of 1,055,000 in October, up 22,000 (2.1%) from the end of 2015.

Completions in multifamily buildings were at a 300,000 rate, down 16,000 (-5.1%) from the end of 2015, and represented 28% of total completed residential units. The 2015 total was the highest year-end total since 326,000 units were completed in 2006.

At the end of October, there were 1,049,000 housing units under construction in the U.S., including 597,000 in multifamily structures, representing 57% of the total.

Multifamily Rents: Class A vs. Class B/C

The gap between class A and class B/C rents in multifamily properties has reached the lowest level in 15 years, representing a value opportunity for small balance investors.

According to data from Reis, the average asking rent for class B/C apartments represented 70.4% of the class A average during Q2 2015. This was the smallest difference on a percentage basis since the same 70.4% rate was measured for the same period during 2000. The largest difference was in 2009, the end of the recession, at 73.4%. Additionally, the net difference between property classes reached a record high of $411/unit during Q2 2015.

Reis data also showed that class A rents have recently grown at a faster pace than class B/C rents. The average asking rent for class A apartments was up 4.2% during Q2 2015 compared to the same time one year ago, while the class B/C average increased 2.5%. Overall, Reis forecasts 2015 year-end rent growth for multifamily properties to finish at 3.8%.

Rent growth in class A properties has been driven by new construction, with Reis reporting nearly 80,000 new units completed so far this year. However, no new class B/C properties have been added to the market so far this year, which could lead to constrained supply in the longer term.


All market data from Reis, Inc.

This report was produced for Arbor Commercial Mortgage, Inc.