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Are we at the Peak for Multifamily Building Permits?

The number of apartment building permits may have reached a peak, apartment data shows.

By Chuck Ehmann | Thursday, November 3, 2016

One year ago, we examined the ratio of multifamily (five or more units) building permits to total residential permits for a few select metro areas — New York, Houston, Dallas, Los Angeles and Seattle, which were the top five multifamily permitting markets at the time.

And while these same metros are at or near the top again this year, what about the nation as a whole? Are multifamily permits taking a larger share of total residential construction compared to historical norms, as they were in the top construction markets? And if so, which direction is the trend moving?

The following chart displays the historical annual average ratio of multifamily permits to total residential permits from January 1961-September 2016, moving monthly. The ratio can grow or fall from either an increase or decrease in multifamily permits compared to single-family, or a corresponding increase or decrease in single-family permits relative to multifamily. Bear in mind that multifamily permits include condominiums, co-ops and, occasionally, town homes that are later revised out of the multifamily total – not just apartment data.

It is evident from the chart that multifamily permits are taking a somewhat higher share of total residential construction in the past few years than preceding the Great Recession. Part of this is the current weakened state of the single-family market coming out of both the recession and the housing-bubble bust that occurred just prior. The September 2016 annual average ratio of 34.5% is down from recent highs near 39%, as single-family continues to improve and multifamily slows slightly.

The ratio from the late 1990s and early 2000s averaged close to 20% as the strong economy and burgeoning housing bubble kept the single-family market strong and dampened the proportion of total housing devoted to multifamily. This was followed by a sharp spike in the ratio as single-family development virtually shut down nationally.

It is also evident from the chart that historically, the ratio of multifamily permits to total residential has been much higher, especially in the late 1960s and early 1970s. From mid-1969 to the end of 1973, the annual average multifamily ratio averaged 45.8%. Almost half of new residential permits were multifamily. A second cycle peak occurred in the 1980s, when favorable tax and lending policies spurred a spike in apartment development. These higher ratio periods elevated the long-term average ratio to 28.7% (still, almost 6 full percentage points below the current ratio).

Along with the short-term cycle peaks and valleys in the chart, a potential “long-cycle” trend can be ascertained with a six-order (or sextic) polynomial trend line with an R2 of 67.3%. Research by several noted economists into the existence of short and long cycles in real estate has found that the typical short cycle lasts about 18 years and that the long cycle is about 50-60 years.

Depending on how you measure the most recent peaks and valleys in the short cycle, we should be close to halfway through the current real estate cycle. If this structural long cycle trend is valid, it would appear that we are near the peak and that single-family permits may take a somewhat larger share of total residential permits over the next several years.

Chuck Ehmann

Chuck Ehmann

Real Estate Economist

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