Multifamily housing supply may be at 30-year highs, but housing demand in many metro markets remains unquenched.
“We continue to see an overall shortage in total housing being delivered to the market,” Freddie Mac said last month in its Multifamily 2018 Mid-Year Outlook. “While the multifamily market continues to experience elevated levels of new construction, and in some metros has surpassed long-run averages, the total amount of housing falls short in many areas and has done so for the past several years,”
Citing data from the U.S. Census Bureau, the Freddie Mac report notes that multifamily completions in buildings with five units and above rose 11%, while permits rose 2% and starts increased 10% in the first six months of 2018.
Meanwhile, with multifamily property prices increasing 11.6% over the past year, apartments continue to provide “stable and safe returns,” according to the report ‒ despite the moderating fundamentals and rising interest rates that could slow origination growth.
Freddie Mac says it sees multifamily origination volume growth slowing to 3.3% in 2018, compared with estimated growth of about 10% in 2017.
Multifamily surplus in Chicago, Dallas, NYC
The report estimates that over the past 10 years, the cumulative housing shortage was about 6 million units, but the gap “has narrowed considerably” with the pickup in construction in recent years.
In metro Atlanta, for instance, the 2017 shortage of total completions was 9,600 ‒ significantly lower than the 2008-2017 average of 19,800. The gap has narrowed to a similar extent in Boston, where the shortage dropped from an average of 19,300 to 9,400 in 2017.
The multifamily shortage shrunk less in Miami, where it went from 22,600 to 20,500.
Some metros, including Chicago, Dallas and New York City, now have surplus multifamily housing ‒ which could result in weak rent growth.
Chicago had a 19,300-unit surplus in 2017 compared to the average 2008-2017 shortage of 1,300 units. Dallas had a 9,000-unit surplus (vs. an average shortage of 12,400 units) and New York City had a 22,600-unit surplus (vs. an average shortage of 17,100).
The trend was flipped in Detroit, where there’s a deepening shortage of multifamily housing.
Detroit saw its multifamily housing drop from an average surplus of 18,700 in 2008-2017 to a 21,700-unit deficit in 2017.
Freddie Mac expects the number of completions to peak “sometime this year,” with supply remaining throughout 2019 and a continued slow increase in vacancy rates, it said in the report.
“Demand will remain robust due to demographic and lifestyle preference but will continue to come in below new supply levels,” the report stated.
Also contributing to demand is a booming economy that has more people working and forming more households ‒ about 1 million new households as of the second quarter of 2018, the report said.