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Market Reporting that Matters

April 2017 Construction Report

April Showers Slow Residential Construction

Tuesday, May 30, 2017


Both total residential starts and permits declined last month, according to the latest U.S. Census figures. The second wettest April on record (according to the National Oceanic and Atmospheric Administration) hampered new construction in the Northeast and South regions.

 

IN THIS ISSUE:

Few Changes in Top
Permitting Places

Post-Recession Multifamily Development – Too Much?

By the Numbers

The 1.229 million total residential housing units permitted in the 12 months ending in April were, on a seasonally adjusted annual rate (SAAR), down 2.5% from March but up 5.7% from April 2016.

  • The annual rate of single-family permits decreased by 4.5% from March to 789,000, which still was 6.2% higher than the April 2016 annual rate. Single-family permitting fell below 800,000 units for the first time since November 2016.
  • Multifamily permits increased to 403,000 units for the 12 months ending in April, up 1.5% from March and 4.1% more than April 2016’s annual rate. April’s rate was the ninth time in the past 12 months the annual rate topped 400,000 units.

Total residential construction starts of 1.172 million units in the 12 months ending in April were -2.6% lower than March, but 0.7% higher than April 2016. The annual rate of total starts fell below 1.2 million units for only the second time since September 2016 because of the volatility of multifamily starts.

  • Despite regionally bad weather in April, single-family starts remained above the 800,000 annual rate at 835,000 units, almost even with March’s annual rate (up 0.4%), but 8.9% higher than April 2016.
  • Multifamily construction starts, at 328,000, were down 9.6% from March, and were 14.6% lower than April 2016. Multifamily starts have averaged 386,000 units per annum in the past 12 months (SAAR), with only one month below 300,000 units.

Total residential completions were down 8.6% from March to 1.106 million units, but were 15.1% higher than April 2016.

  • Single-family completions dipped -4.5% on an SAAR basis from March but were 10.1% higher than April 2016’s annual figure.
  • Multifamily completions plunged -19.8% from March’s revised rate to 299,000 units, but were up 24.6% from April 2016 -- 59,000 units more than last April.


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Other U.S. Census statistics of note:

  • Total annual starts in April 2017 were up strongly from the April 2016 rate in the West (23.4%) and flat in the Midwest (1.0%). They were down modestly in the South (-1.5%) and sharply in the Northeast (-34.2%).

  • Annual single-family starts were down in the Northeast (-16.4%), and Midwest (-0.8%), but up in the South (7.3%) and West (29.9%).

  • Multifamily construction starts declined by half in the Northeast (-50.2%) and by one-fifth in the South (-22.6%), but were up in the West (12.7%) and Midwest (5.7%).

  • Annual total permits were up in three of four regions, with increases in the West (18.3%), Northeast (13.0%) and Midwest (1.6%). The South (-0.5%) saw a modest decrease.

  • The annual rate of single-family permits increased in three regions as well, led by the Midwest (13.8%) and followed by the West (8.4%) and South (5.0%). The Northeast (-7.1%) had a modest decline in single-family permits.

  • Annual multifamily permits jumped in the Northeast (38.9%) and West (36.8%), while the South (-14.0%) and Midwest (-17.6%) reported net declines.

  • Single-family completions increased in all regions with double-digit gains in the West (15.8%) and Northeast (10.7%), and moderate gains in the Midwest (8.5%) and South (8.3%). Multifamily completions were up sharply (on an SAAR basis) in the Midwest (79.0%) and South (44.2%), but down in the Northeast (-39.3%) and West (-10.0%).

 

Few Changes in Top 10 Permitting Places

The top 10 Metropolitan Statistical Areas for multifamily permitting for the trailing 12 months ending April 2017 were:


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Nine of the top 10 metros remained the same as in March, but several metros changed positions. Los Angeles and Seattle switched the Nos. 3 and 4 positions, and Washington, DC and Phoenix switched at Nos. 7 and 8. Austin moved from No. 9 to No. 10 (displacing Houston), and Chicago moved up to No. 9 from No. 11.

Half of the top 10 metros issued fewer multifamily permits in the 12 months ending in April 2017 than they did the year before. New York continues to experience sharp declines from its 421-a bulge last year with a drop of 50.1%. Dallas and Atlanta each had double-digit declines in multifamily permits, while Austin and Los Angeles also declined. Houston’s 46% decline is the second strongest pullback of the major metros, dropping it out of the top 10 for the first time in several years.

Development is ramping up in Seattle, Denver and Phoenix, as each permitted at least 3,200 units more than last year, with percentage increases averaging more than 50%. Washington, DC and Chicago also had double-digit gains in multifamily permits on smaller bases.

With annual declines in the top three apartment markets, the annual total of permits issued in the top 10 metros – 142,704 – was 11% lower than the 160,829 issued in the previous 12 months. The total number of permits issued in the top 10 metros was almost equal to the number of permits issued within the 11th-41st ranked metros. A year ago, permits issued in the top 10 metros almost equaled the 11th-45th ranked markets.

Non-top 10 metros that permitted at least 2,000 more units than last year included Minneapolis (+3,242), Raleigh (+2,959), Fort Worth (+2,570) and Jacksonville (+2,182). Declines of at least 2,000 units occurred in Houston (-7,521), Nashville (-5,447), Newark (-3,131), Anaheim (-2,641) and Bridgeport (-2,081).

Access the latest permit trends tables in Excel format here.

Jay Denton
Senior Vice President
jdenton@axiometrics.com

KC Sanjay
Sr. Real Estate Economist
skc@axiometrics.com

Chuck Ehmann
Real Estate Economist
cehmann@axiometrics.com

 

 

Post-Recession Multifamily Development – Too Much?

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 percent of multifamily 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 multifamily product? New York is perhaps the most notable example in this case, as the metro’s high population density favors multifamily product (for sale and rental).

Headline after headline suggests multifamily development 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, in which developers rushed to get permits before a mid-2016 expiration of affordable housing tax breaks. 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 to build multifamily product 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.  

 

By the Numbers

The table below shows multifamily permitting and job gain/growth for some of the top metropolitan areas, with several categorized by state or region.

 


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The table below highlights multifamily permitting by place. Some of the top places on a trailing 12-month basis through April 2017 were:

  • City of Los Angeles (11,827 units)
  • City of Seattle (8,777 units)
  • City of Chicago (8,759 units)
  • City of Denver (8,359 units)
  • City of Dallas (6,522 units)
  • City of Atlanta (6,367 units)
  • Borough of Brooklyn (5,952 units)
  • Borough of Manhattan (5,618 units)

The top 40 places (out of 5,073 U.S. Census places) for permitting of properties with five or more units were:

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