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Market Reporting that Matters

January 2017 Construction Report

An Up and Down January

Thursday, March 2, 2017


Total residential starts and permits moved in opposite directions again in January, according to the latest U.S. Census figures.

IN THIS ISSUE:
Unit Mixes are Trending Smaller
By the Numbers

  • The 1.285 million total residential housing units permitted in the 12 months ending in January were, on a seasonally adjusted annual rate (SAAR), up 4.6% from December and up 8.2% from January 2016.

    • The annual rate of single-family permits dipped 2.7% from December to 808,000, but that figure was 11.1% greater than last January’s annual rate. Single-family permitting topped 800,000 units for the second straight month.
    • Multifamily permits jumped to 446,000 units for the 12 months ending in January, up 23.5% from December and 4.7% from January 2016’s annual rate. This is the fourth time in the past 12 months that annual multifamily permits exceeded 400,000 units.

  • Total residential construction starts of 1.246 million units in the 12 months ending in January were 2.6% lower than December, but 10.5% more than January 2016. The annual rate of total starts has surpassed 1.24 million units for the past two months after averaging about 1.18 million units for the past year.

    • Single-family starts of 823,000 units were up 1.9% compared to the previous month’s annual rate, and 6.2% higher than the January 2016 rate.
    • Multifamily starts accounted for the January dip in total starts, with the annual rate decreasing 7.9% from last month to 417,000 units, but they were 25.7% higher than January 2016. Multifamily starts have averaged 387,000 units in the past 12 months (SAAR).

  • Total residential completions were down 5.6% from January 2016 to 1.047 million units and 0.9% from December.

    • The 800,000 single-family houses completed on an SAAR basis were 4.3% more than December’s annual figure and 15.8% higher than January 2016’s rate of 691,000 units. The last time single-family completions reached 800,000 units was in September 2008.
    • The 244,000-unit annual rate for multifamily completions was down 26.93% from December, and 29.9% from January 2016.

 

 

Other U.S. Census statistics of note:

  • Total annual starts in January 2017 were up strongly from the January 2016 rate in the Midwest (21.3%) and South (19.2%). They were down in the Northeast (-3.4%) and the West (-8.5%).

  • Annual single-family starts were up in the Midwest (5.4%), South (7.8%) and West (5.7%), and down slightly in the Northeast (-1.6%).

  • Multifamily starts continued to decline in the Northeast (-4.8%), plunged in the West (‑33.7%) and were up significantly in the Midwest (100.0%) and South (50.6%).

  • Annual multifamily permits rebounded in the Northeast (172.7%), but only to 90,000 units from 33,000 one year ago, while multifamily permitting in the Midwest (-21.1%), West (‑12.9%) and South (-1.1%) declined.

  • Annual single-family permits declined slightly in the West (-1.2%), but were higher in the Northeast (9.3%), Midwest (8.8%) and South (17.4%).

  • The annual rate of total permits declined in the Midwest (-4.8%) and West (-6.6%), pulled down by annual multifamily permits, but the Northeast (71.3%) and South (11.5%) achieved strong gains.

  • Multifamily completions decreased (on an SAAR basis) from January 2016 in all regions, with significant slowing in the Northeast (-63.2%) and West (-62.3%) while the Midwest (-12.2%) and South (-5.1%) also experienced declines. Single-family completions were up in the South (21.1%), Midwest (20.4%), and Northeast (11.7%), but were unchanged in the West (0.0%).

Metro Focus

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

 

The top 10 metros remained the same as in December, but the last three changed positions. Houston moved up to No. 8 from No. 10, bumping Phoenix and Chicago down one spot each. The order of the top seven was unchanged.

Four of the top 10 metros issued fewer multifamily permits in the 12 months ending in January 2017 than they did the year before. New York is still seeing sharp declines from its 421-a bulge last year with a percentage drop of 56.9%, followed by Houston’s 50.2% decline.  Dallas and Los Angeles continued to slow, while Seattle came in about even with last year’s pace of permitting. Atlanta, Denver and Phoenix each permitted at least 2,400 units more than last year, and Chicago had a moderate gain in multifamily permits of 622 units.

With declines in the top three markets, the annual total of permits issued in the top 10 metros – 136,741 – was 24% lower than the 180,703 issued in the previous 12 months. Multifamily permits had been heavily concentrated in the top 10 metros, but multifamily construction is ramping up in several smaller markets as it slows in some of the top markets.

The total number of permits issued in the top 10 metros was almost equal to the number of permits issued within the 11th -26th ranked metros. A year ago, permits issued in the top 10 metros almost equaled the 11th -58th ranked markets.

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

 

Unit Mixes Are Trending Smaller

Trends within the apartment industry are constantly evolving and shifting. Some of these shifts are more immediate, while others morph over a much longer period. Anecdotal evidence from apartment developers suggests one shift in recent years has been toward fewer three-bedroom units and a heavier concentration of studios and one-bedroom units.

Axiometrics conducted an analysis of conventional Class A properties built after 2009 (i.e. apartments built during the current cycle) to see if there actually is a shift in unit mixes at new properties. Even in this cycle, the evidence suggests an ongoing shift away from three-bedroom units to other unit types. From the table below, a clear shift in the ratios by bedroom types occurs in 2013.

Between 2010 and 2012, three-bedroom units made up nearly 11% of all new deliveries, reaching as high as 12.9% in 2011. From 2013-2016, however, only about 8.0% of all new deliveries were three-bedroom units.

The data shows that much of the decline in the share of three-bedroom deliveries was made up by an increased share of studio and one-bedroom units. From 2010-2012, studios made up about 2.6% of all deliveries, but that share has jumped up to average 4.5% since 2013.

Perhaps the most notable piece of this analysis is one-bedroom units. One bedrooms constituted an average of 39.4% of all deliveries from 2010-2013. From 2013-2016, that share jumped to 45.4% -- a 600-basis-point (bps) increase.

Finally, two-bedroom floorplans also have become less common. The 2010- 2012 share of two-bedroom units comprised 47.0% of all new deliveries. That share dropped to 42.9% from 2013-2016 – a 504-bps drop.

Breaking down deliveries in urban core and suburban submarkets also reveals an interesting trend as we start to assess unit mixes in these areas. The first interesting bit of information is the sheer number of suburban units delivered relative to urban units. Urban core submarkets are often much smaller geographies than suburban submarkets (indeed, the name “urban core” itself implies a small geographic area).

 

Not surprisingly, the number of deliveries ramped up slowly in the first years of the recovery – a direct byproduct of the recession. More new supply began entering the market in 2013, and has increased every year since. For all of the discussion regarding the impact of large amounts of new supply in urban core submarkets, the overall share of deliveries in urban submarkets (10.1%) built this cycle seems surprisingly low.

Instead of looking at the overall share of units, it is more helpful to look at the timing of urban core deliveries. In the early part of the recovery, supply was catching up with demand. As it did, rent growth in urban cores slowed – a prime example of how supply/demand impacts pricing.


The chart above shows that urban core rent growth began moderating before the bulk of new supply was delivered. As more new supply continued to enter urban core submarkets, rent growth slowed further from 2013 onward. Deliveries in urban core areas in 2013 alone were greater than the previous three years combined. While the share of urban core deliveries has remained between 10%-11% since 2013, the increasing volume of deliveries is impacting rent growth. The end result is the period of slowing growth visible in the graph.

The following charts further highlight urban core versus suburban submarket dynamics, as well as floorplan-specific rent levels as of January 2017.


This graph shows the average rent per square foot that various floorplans are achieving for the year on the Y-axis corresponding to the year in which they were built (X-axis).

It is common knowledge that smaller floorplans achieve higher rent-per-square-foot (RPSF) premiums (all other things being equal), which is clearly supported by this graph. One would also expect the newest properties to have higher RPSF, which is also generally supported by this graph.


Stratifying this construction into an urban core/suburban dichotomy shows urban core submarkets have a higher variance between floorplan-specific RPSF than suburban submarkets which may be attributable to two factors. The first is the smaller sample size in urban core properties for these years.

The second may be specialty product in urban areas. Microunits fall within the studio classification, which may be pulling RPSF numbers up for this category. Meanwhile, luxury product (specifically penthouse units in high-rise properties) may be causing three-bedroom units to achieve a higher RPSF than one may normally expect.


The immediate story these graphs tell is that urban core units achieve a higher RPSF than suburban submarkets – again, an unsurprising conclusion. Some of the variation in urban core RPSF numbers can also be attributed to a smaller sample size.

The remarkable consistency of RPSF variance by floorplan – regardless of year built – in suburban submarkets is worth pointing out. Although the general trend is that RPSF increases as bedrooms per floorplan decrease, that gap has been tightening slightly in recent years.

The data at hand suggests that the general trend is shifting towards smaller units. Additionally, although suburban submarkets have seen the lion’s share of new supply, the increasing amount of new supply in urban core areas may be affecting rent growth performance in those areas.

While some of these trends are more location-centric (e.g. larger share of one-bedroom units in the urban core in recent years relative to the beginning of the current cycle), there does seem to be truth behind the anecdotal claims that smaller units are making up a larger share of new deliveries.

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. NOTE: January job gain figures will not be released until March 13.


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

  • City of Los Angeles (11,572 units)
  • City of Dallas (8,382 units)
  • City of Seattle (8,255 units)
  • City of Atlanta (7,229 units)
  • City of Chicago (6,967 units)
  • City of Denver (6,589 units)
  • City of San Diego (5,122 units)
  • City of Houston (5,027 units)

The top 40 places (out of 4,147 U.S. Census places) for permitting of properties with five or more units were:

 

 

 

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