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2010s: The Decade of Less Apartment Construction?

Supply Pales Compared to '70s, '80s

By Chuck Ehmann | Friday, August 5, 2016

There has been some speculation and concern that the amount of new apartment construction during the recovery from the Great Recession could lead to overbuilding and oversupply. Based on Axiometrics’ analysis of data reported by the Census Bureau, those concerns are unfounded.

The chart below graphs multifamily (five or more units) completions as reported by the Census Bureau from their monthly Survey of Construction (SOC) aggregated by decade. The Bureau estimates completions based on a sample of permits and starts, along with interviews with builders and owners. Completions figures are typically less than permits and starts for a variety of reasons. Roughly 22.5% of multifamily units permitted do not become starts for the following reasons:

  • Reclassification: Townhouses are classified as single-family houses according to Census definitions. However, permit offices frequently classify them as multifamily structures.
  • Abandons: Construction is sometimes abandoned after permits are issued but before construction is started. Abandon rates can fluctuate over time due to conditions in the economy.
  • Design Changes: Builders also can make design changes after the original permits are issued. This is more common with apartment construction, in which the final number of units may be more or less than originally planned.
  • Misclassification: Permit offices sometimes incorrectly classify permits as new residential construction when the permits are actually for home improvements, the setting up of mobile homes, or the construction of nonresidential buildings.

In addition, about 7.5% of multifamily starts are not completed because of abandonment or design changes. Multifamily data from the Census Bureau includes condominiums and co-ops, but they comprise only about 6% of the multifamily supply nationally and would not make a significant difference in this analysis.

Based on the aggregated data, the 1970s had the most multifamily construction (4.88 million units), followed by the 1980s with 4.21 million and 1960s with 4.18 million. Renter household formation was strong in these three decades, averaging 4.5 million per decade as many young people – especially women – moved out to create their own households and entered the workforce, college or both. Renter household formation includes all renters, including those of single-family homes. During this period, multifamily completions comprised about 30% of all completions.

Before the Great Recession, the 1990s had the fewest multifamily completions (2.16 million units), less than half the average of the previous three decades. Only about 17% of all completions were multifamily units in this decade, as almost 11 million single-family homes were constructed.

The first decade of the new millennium saw more than 2.7 million multifamily units completed, about 62% of the average multifamily completions from 1960-1989, but still only about 18% of all units. Renter household formation slowed to about 1.3 million per decade as homeownership became the trend throughout this period.

So far this decade, less than 1.2 million multifamily units will be completed through 2016, an annual average of 194,000 units per year since 2010, according to Census data. At this pace, slightly less than 2 million multifamily units will be built this decade, the least of any decade since 1960. Renter household formation mushroomed to more than 7 million after the recession as foreclosed homeowners joined millennials and baby-boomers who chose to rent due to lifestyle choices and economic factors.

Based on these completion figures from the Census Bureau, it does not appear that overbuilding of multifamily units is occurring on a national basis. Local development concentrations at the metro and submarket level are another story, as pockets of oversupply could occur in the cities and neighborhoods that are most popular with developers and lenders.

 

Chuck Ehmann

Chuck Ehmann

Real Estate Economist

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