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Post-Recession Apartment Construction: Too Much or Just Enough?

Actually, development is still-playing catch-up.

By Carl Whitaker | Wednesday, May 31, 2017

 

 

No two metros are exactly the same when it comes to housing stock. Some metros are more heavily weighted toward single-family homes, while others feature a larger percentage of apartment inventory.

Some widely-accepted examples of single-family skewed markets include Dallas, Atlanta and Phoenix. It is probably no coincidence these markets favor single-family product because they are well-known for their suburbanization and sprawl – a phenomenon that historically embraces the idea of single-family housing.

On the other hand, which markets are more heavily tilted toward apartments? New York is perhaps the most notable apartment market, as the metro’s high population density favors multifamily product (for sale and rental).

Headline after headline suggests apartment construction has dominated in recent years, even implying the current pace is unsustainable. But how much truth is there to the claim that development patterns have changed in recent years? In other words, how does pre-recession housing development compare to recently developed housing?

To analyze historic development relative to recent development, we have compared residential permits issued by type from 1988-2009. We then compare the permits issued from 2010-April 2017.

The following table compares the total number of permits pulled by type from 1988-2009 by metro.



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The presumption that Phoenix and Atlanta are dominated by single-family product appears to be true from this table. In Phoenix, 81.4% of all permits issued were single-family, as were 78.3% of all permits in Atlanta. Houston and Orlando also topped 70% for single-family permitting. Surprisingly, Washington, DC’s single-family permitting accounted for three-quarters of all residential permitting in the market before 2009, but that also includes the outer regions of the metro in northern Virginia and Maryland.

San Francisco and New York are two of the nation’s priciest apartment markets – both from the developer’s and a renter’s perspective – so it may be surprising to some that the two markets have the highest share of multifamily permits. These two markets are, however, among the nation’s most densely populated, so the larger share of multifamily permits issued for these cities is at least partially caused by density and geographic restrictions that make multifamily housing more common than in other metros.

Our second table of comparison shows the total number of permits pulled by type from 2010-2017 by metro.



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No other market saw a larger shift toward multifamily permits than New York, veering from 44.6% multifamily pre-2009 to 77.6% after 2009, although much of this can be attributed to the 421-a tax abatement issue. Boston and Washington, DC also had large upticks in the share of multifamily permits, although only Boston’s 25.7% to 53.0% increase really challenges New York’s increase.

Interestingly enough, all 10 markets increased their share of multifamily permits, with only Houston and Atlanta experiencing a relatively small increase. All other markets’ share of multifamily permits increased by more than 10%.

This certainly suggests plans for apartment construction are more common than in previous years, naturally causing the share of single-family permits to decrease simultaneously. Coupled with the slower recovery of the single-family market after the housing bubble, multifamily would have to take a larger share of overall residential permitting. Does this suggest too much building activity within the multifamily sector?

To analyze this, we can take a look at some similar permitting data, but represented in a different manner.



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Analyzing permitting levels back to the 1980s, it becomes evident that the nation is only now returning closer to long-term average permitting levels. Multifamily permitting has just ticked above the long-term average in recent years, while single-family has remained well below.

Apartment market fundamentals have been strong for many years, in large part because of the lack of supply as the nation emerged from the recession and the weakness of the single-family market. As supply has caught back up to demand, fundamentals have slowed, according to apartment market data.

It is important to remember though that supply is doing just that – catching up. It has still not outpaced demand (generally speaking, specific examples of some overheated submarkets can be provided). Furthermore, the lack of new single-family home development – especially affordable starter homes – indicates the demand pool for multifamily should not be drying up any time soon.

 

 

 

 

Carl Whitaker

Carl Whitaker

Real Estate Analyst

Carl Whitaker is a Real Estate Analyst for Axiometrics.

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