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Builder Index Shows Confidence Dip In Multifamily Market

Rising Rents Could Impede Landlords' Ability to Lease A Growing Number of New Apartment Projects Entering the Market
March 3, 2014
A key measure of developer sentiment about conditions in the apartment and condominium markets weakened in the closing months of 2013, according to the National Association of Home Builders (NAHB).

The Multifamily Production Index (MPI), released by the NAHB on Friday, declined four points to 50 in fourth-quarter 2013 over the prior quarter, falling to its lowest reading since fourth-quarter 2011.

The index is a scaled composite of three measures of construction in the multifamily housing market, including low-rent units, market-rate rental units and for-sale condominiums. A score of 50 shows that an equal number of respondents report that conditions are getting worse as report conditions are improving.

Of the trio of components, builder perceptions of higher rent market-rate properties have so far been the strongest during the apartment recovery and expansion, remaining above 50 for 13 straight quarters. However, the market-rate index dipped four points in the fourth quarter to 60. Low-rent units fell three points to 47, while the for-sale unit measure declined four points to 46.

The Multifamily Vacancy Index (MVI), which measures the industry's perception of condo and apartment vacancies, dropped two points to 38, with a lower number indicating fewer vacancies. The index began to improve consistently in 2010 and has been fairly stable since 2011 following its peak of 70 in the second quarter of 2009,

Despite the most recent dip in builder sentiment, multifamily demand remains strong, with high occupancies in existing assets. The continued decline in the U.S. homeownership rate and increases in household formation are driving demand, along with favorable demographic trends, including the rising numbers of younger people entering the job market and retiring Baby Boomers scaling down into multifamily housing.

Among all commercial property types, multifamily projects saw the largest increase in construction starts in January -- 7.2% on a three-month moving average, according to F.W. Dodge data analyzed by Citi. Lodging starts increased by 3.2%, with office experiencing a slight increase at 0.7%. Industrial and retail construction starts recorded declines of 5.9% and 4.1%, respectively.

Construction growth, measured by starts as a percent of existing stock, was highest in the high-growth markets of Denver at 2.1%, Phoenix, 1.9% and Dallas, 1.9%, according to Citi.

"Multifamily developers are still seeing demand for apartments," said W. Dean Henry, CEO of Legacy Partners Residential in Foster City, CA, and chairman of NAHB’s Multifamily Leadership Board. "However, the cost and availability of labor is putting pressure on the ability to bring new units online."

New supply could also become an issue in markets such as Houston, Dallas-Fort Worth, Washington, D.C. and Seattle. The number of multifamily starts is returning to average levels and permits have already surpassed the historical average since 1983, according to CoStar data.

While the ranks of the employed have grown significantly, the U.S. labor participation rate remains a weak 62.8%, the lowest since 1978, said Luis Mejia, CoStar Group director of U.S. research, multifamilu, during the fourth-quarter and year-end multifamily review and forecast.

"The fact is jobs created in this recovery haven't been enough to match the needs of the growing population, especially in the younger cohort," Mejia said.

Affordability of the rising tide of new apartment units is going to be a growing concern through 2014, with widening spreads between rental rates for the new high-end units coming on line over existing 5- and 4-star apartment inventory, Mejia said.

"Given that the number of potential renters who can afford these really higher price points is limited, some new construction may have a harder time leasing up than previously imagined," Mejia said.
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