Dive Brief:
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The continued cooldown in multifamily construction activity, which is contributing to a tighter project lending environment, is evidenced in the latest reading of the National Association of Home Builders’ Multifamily Production Index, which fell seven points in Q1 to a score of 48. The last time the index fell below the breakeven threshold of 50 was in Q4 2011. Scores above 50 indicate improving conditions.
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The MPI measures construction of low-rent and market-rate rentals as well as for-sale condos. Each measure declined in Q1, with low-rent units down six points to 48, market-rate units sliding three points to 55 and for-sale units dropping nine points to 43.
- The index’s measure of vacancies fell by one point to 41 in Q1, reporting fewer vacancies than the prior quarter, and down from its peak of 70 in Q2 2009.
Dive Insight:
Following strong growth immediately after the recession, the multifamily market has tapered off more recently and with it widespread interest in financing new multifamily construction projects. In its 2017 market outlook report, Dodge Data & Analytics economists forecast the year's multifamily starts would decrease by 2%, or 435,000 units. Starts in the segment fell 9.6% from March to April, representing a rate of 328,000 starts, and were 14.6% behind the year-ago mark.
Where there is new development, it has been focused on the luxury segment, while demand is strongest in the low- to middle-income tiers. Multifamily completions are forecast to reach a cycle high in 2017 as many projects that already secured approvals and funding wrap up. A February report by Axiometrics posited that 2017 will bring a 30-year high for multifamily development, which could help ease rising rents, but that big banks are retreating from new multifamily deals.
Axiometrics predicted last fall that Q2 2017 will bring in the most new multifamily units of late, after which point the growth rate will taper.
Home prices recently exceeded their pre-recession peak while rents have begun to stagnate. While renters tired of rising rates had been turning to homeownership as a way to stabilize volatile month-to-month housing costs, a slowdown in rent growth while home prices continue to climb could cause a subtle shift in that trend. But as builders race to add more supply in the entry-level and trade-up categories, the respective appeals of renting and owning are likely to vary by market.