In a promising turn for the rental market, multifamily housing is on the rebound, fueled by a trifecta of favorable factors. Lower lending rates and improving economic conditions are injecting a renewed vigor into property investments while bolstering confidence among builders and developers.
“Overall, last year was a challenging year with higher interest rates while people not moving hurt the multifamily and builder business,” said Tracy Wyrick, vice president of sales, builder and multifamily, Engineered Floors. “We expect it to be better this year with the second half being the strongest.”
The projected uptick in multifamily housing, which is approximately 95% for-rent, is underscored by a notable surge in housing starts and completions. Multifamily units under construction climbed last month to 404,000 annualized units, the highest tally since July and a 9% increase over the month prior, according to the U.S. Census Bureau and U.S. Department of Housing and Urban Development. Meanwhile, the November rate for housing completions for buildings with five units or more jumped 26.5% over the seasonally adjusted annual rate in October to 472,000.
Still, the numbers must be taken with a grain of salt as the November housing starts figure was 34% less than the same month the prior year while authorizations of units declined nearly 10% over October 2023 to 435,000. “I think builder projects on hold are delayed until financing costs come down,” said Brian Carson, AHF Products president and CEO. “You have to design the property, get permits and arrange the financing—so there is a little bit of a lag.”
As construction activity closed in 2023, the multifamily market experienced a decline amid tight lending conditions and the largest number of units under construction since 1973. “Apartment construction is expected to post a 15% decline for 2023 and a larger drop in 2024, with multifamily starts down 17%,” said Robert Dietz, senior vice president and chief economist at the National Association of Home Builders (NAHB). “The market will stabilize as lending conditions improve later in the year.”
The multifamily sector—which represents a bit of a mixed bag—includes everything from apartments and condos to senior living spaces, student housing and factory-built homes. In the multifamily market, low housing affordability for single-family homes will keep many buyers in the rental market or push others to choose condos or townhouses.
Last year saw a confluence of factors that wiped away positive gains made in the multifamily sector the prior year. These ranged from surging construction materials costs and financing rates to inflationary and lingering supply chain issues. “In multifamily, interest rates have put some projects on the shelf until the cost of capital comes down and the projects pencil out again,” said Todd Hershauer, director, builder and multifamily, Mannington.
Others, including Graham Howerton, president, FEI Group—the nation’s largest network of interior/exterior finish contractors and interior finish showrooms—agreed. “The cost of capital, plus an increase in construction materials costs, impacted the construction market,” he said. “Property managers and owners pulled back significantly on capital improvements. Common and corner area improvements and amenity upgrades are important to multifamily contractors.”
Meanwhile, confidence in the market for new multifamily housing was in negative territory for the third quarter, according to results from a newly released Multifamily Market Survey (MMS), which measures builder and developer sentiment about current production conditions in the apartment and condo market. “High operating costs are creating problems for existing properties, especially affordable properties, and the cost and reduced availability of credit is making it difficult to finance new projects,” said Lance Swank, chairman of NAHB’s Multifamily Council and president and CEO of Sterling Group, located in Mishawaka, Ind.
Stalled momentum
After a stunning year in 2022—the best in terms of new units since 1985, a Dodge Construction Network report shows—multifamily starts plummeted and were down 17% year-to-date through the first 10 months of 2023. “Tighter lending standards and declining investment hurt the sector in 2023,” said Sarah Martin, associate director of forecasting, Dodge. “This will be magnified moving forward as multifamily units started in 2021 and 2022 begin to hit the market, pushing up vacancy rates.”
Rising vacancy rates had a del- eterious impact on projects in the planning queue as the dollar value of projects entering planning fell 13% since its most recent peak in January, Dodge reports. Additionally, the mid-point of the multifamily market—hard construction costs between $25 million and $50 million—was flat on a year-to-date basis. “This is a stark contrast to high-end projects greater than $100 million, which were down 21% through the first nine months,” Martin noted.
There is some risk of a broader downturn developing this year, as a preponderance of multifam- ily starts in 2022 were high-end units. “However, given how low vacancy rates are across the country from a historical perspective, the concern is minimal,” Martin explained. “Economic recovery in 2024 will lead to a return to growth in multifamily starts.”
Another issue: Rental prices have been falling because there are so many new units in the marketplace. “If property man- agers and owners continue to of- fer concessions in the short term and not raise rents or offer reductions, you will have fewer people moving into new apartments,” FEI Group’s Howerton noted.
Housing trends impact flooring sales
Flooring industry members keep a watchful eye on business con- ditions that stand to impact soft and hard surface sales to new homebuyers. One of the biggest is the ongoing skilled labor shortage, which reportedly is contributing to construction delays and higher homebuilding costs. “The skilled labor shortage continues, affecting all elements of the residential construction industry,” NAHB’s Dietz said. “The sector is currently short more than 400,000 workers, with 721,000 hires required in 2024 per an NAHB estimate for the Home Builders Institute.”
Builders are challenging suppliers to innovate and bring value to the market, which is crucial in times like this, industry members say. Some notable innovations center on luxury vinyl plank flooring, as looks and performance have come a long way over the years. “New innovations, like advanced printing technologies, have enabled LVP to more authentically replicate the look of natural wood, stone and tile,” observed Scott Baker, vice president of sales, builder/ single family, Shaw Industries. “Advances in embossed-in-register and bevel options provide a more realistic look and feel without sacrificing durability.”
FEI Group’s Howerton reported members are primarily install- ing vinyl plank floors. “One of the biggest reasons for that is a continued increase in the pet-friendly dynamic,” he explained. “So many communities have shifted to a pet-friendly model.”
AHF’s Carson said the con- sumer is still migrating toward floors that replicate the look of stone and wood. “Just look at the growth of vinyl planks and laminates and the resurgence of wood the past couple of years,” he stated.
