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July 2017 Construction Report

Permits Indicate Apartment Building Slowdown

Wednesday, August 30, 2017

Annual total residential starts and permits fell in July from the previous month, according to the latest U.S. Census figures, as the volatile multifamily sector swung down again from one month and one year earlier– further adding to expectations that apartment construction will moderate in 2018 and 2019.

Single-family permitting and starts continued their healthy pace, as the housing market’s gradual improvement remained on track.

 


IN THIS ISSUE:

Top Permitting Places Remain Familiar

Are "Plexes" on the Way Out?

By the Numbers


  • The 1.223 million total residential housing units permitted during the 12 months ending in July were, on a seasonally adjusted annual rate (SAAR), down 4.1% from June but up by the same amount from July 2016.
    • The annual rate of single-family permits equaled that of June at 811,000, but was 13.0% higher than the July 2016 annual rate. Single-family permitting exceeded the 800,000-unit level in six of the past eight months.
    • Annual multifamily permits dropped 12.1% from June’s annual rate to 377,000 units, which was 11.7% less than July 2016. Multifamily permits fell below 400,000 units for the sixth time since November 2016.
    • Total residential construction starts of 1.155 million units in the 12 months ending in July were 4.8% less than June and 5.6% lower than July 2016. The annual rate of total starts dipped below 1.2 million units for the fourth time in five months.
      • Annual single-family starts of 856,000 homes were 0.5% less than June’s annual rate, but 10.9% more than July 2016’s.
      • Multifamily construction starts of 287,000 units were down 17.1% from June’s revised rate of 346,000, but were down an Impressive 35.2% from July 2016. Annual multifamily starts averaged 387,000 units during the first six of the past 12 months but only 336,000 for the most recent six months – a 50,000-unit decline.
    • Total residential completions were 1.175 million units, 6.2% lower than in June but 8.2% higher than July 2016.
      • Single-family completions were down by 1.6% on an SAAR basis from June, but were 8.8% higher than the July 2016 annual figure.
      • Multifamily completions remain elevated from last year, increasing 6.9% from July 2016, although down 14.9% from June.

 


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Other U.S. Census statistics of note, comparing July 2017 to July 2016 annual rates:

  • Total annual starts in July 2017 were up in the Midwest (14.0%) and West (6.8%). They were down 16.5% in the South and by 3.7% in the Northeast as multifamily starts plunged in these regions.
  • Annual single-family starts were up by double digits in three regions: the Midwest (16.7%), Northeast (13.6%), and West (12.9%). The South increased by 8.2%.
  • Multifamily construction starts declined by two-thirds in the South (-67.8%) and were down sharply in the Northeast (-19.2%) and modestly in the West (-3.5%). The Midwest experienced a moderate increase in multifamily starts of 6.4%.
  • Annual total permits were up in the Northeast (17.0%), West (14.1%) and South (1.3%), but declined in the Midwest (-9.0%).
  • The annual rate of single-family permits increased in all regions, led by the South (14.4%) and followed by the West (12.7%), Northeast (9.8%), and Midwest (9.4%).
  • Annual multifamily permits increased in the Northeast (24.7%) and West (16.3%), but decreased sharply in the Midwest (-37.9%) and South (-24.8%).
  • Single-family completions increased sharply in the Northeast (59.2%), by double-digits in the South (11.4%), were virtually unchanged in the West (0.6%), but declined in the Midwest (-8.9%). Multifamily completions were up strongly (on an SAAR basis) in the South (43.6%) and Midwest (26.4%), but declined just as sharply in the Northeast (-35.4%) and West (-22.2%).

 

Top Permitting Places Remain Familiar

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


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Nine of the top 10 metros remained the same as they did in June and in the same order. Miami moved up from No. 14 to supplant Phoenix at No. 10, dropping the Valley of the Sun to the No. 12 spot. Aside from the Phoenix/Miami switch, the metros in the Nos. 11-20 rankings also remained the same as last month.

Only two of the top 10 metros issued fewer multifamily permits in the 12 months ending in July 2017 than they did in the preceding 12 months. Dallas and Atlanta each had double-digit declines in multifamily permits: -19.8% and -21.7%, respectively. Houston remains the largest metro with the steepest pullback in multifamily permits, dropping almost 50% from last year to only 6,167 units, and down almost 77% from the annual rate in July 2015. Nashville (-54.0%), Baltimore (-51.9%), West Palm Beach (-43.7%) and Anaheim (-42.9%) were some of the major markets with steep multifamily permitting declines from last year.

Multifamily permitting is rising in Minneapolis-St. Paul, Denver, Chicago, Miami, Oakland and San Jose Each permitted at least 2,000 more units than last year, with percentage increases averaging more than 57%. Los Angeles, Jacksonville, Salt Lake City, Riverside and Reno also had double-digit gains in multifamily permits with at least 1,300 more units than last year.

With eight of the top 10 apartment markets reporting increases in annual multifamily permits, the annual total of multifamily permits issued in the top 10 metros – 141,121 – was 5.3% greater than the 134,044 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-38th ranked metros. A year ago, permits issued in the top 10 metros almost equaled the 11th-35th ranked markets.

Access the latest permit trends tables in Excel format here.

Please contact us at info@axiometrics.com if you have any questions.

Are "Plexes" On Their Way Out?

A few years ago, we examined the often-overlooked plex market. This category of building permits for 2-4 units – comprised of duplexes, triplexes, and fourplexes – is rarely in the news but, although numerically small compared to single-family and 5+ multifamily, they nonetheless contribute to the overall housing supply around the country.

Few people buy or build a multiunit “plex” unit to house themselves and perhaps other family members. Some may occupy one-half and lease the other unit, but the vast majority of multiunit properties are for lease. They compete to some degree with apartments, for-lease single-family and rental condominiums or townhomes. Some developers cater exclusively to this development style and build communities and neighborhoods a little at a time (and keep their debt load down), but a lot of the small-scale multifamily development around the country is more of a “mom & pop” operation. Small investors just getting into the real estate rental market can purchase a duplex or fourplex and reduce, if not cover, their mortgage payment with collected rent.

But are the days of the duplex going the way of the dodo bird? Based on the trends in the following chart, it looks scary. From 1960-1987, the average ratio of 2-4-unit permits to total residential permits was 7.3%, with a few peaks and valleys in between. In fact, in the early 1980s, plex units comprised more than 10% of all residential units permitted.


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That ratio appeared to have leveled off at an annual average of 4.4% from 1988-2008. This period includes some strong national economic growth spurts, including the pre-Great Recession housing bubble. The year 2008 was also the last year the ratio exceeded 4%. From the time of the recession forward, the ratio of plex units to total residential permits has steadily declined. From 2009-July 2017, the ratio for plexes has fallen to less than 3%, averaging 3.3%.

For comparison, the ratio of 5+ multifamily units to total units permitted also is included in the above chart. While there have been fluctuations in 5+ unit permitting since 1960, and the long-term general trend for 5+ multifamily has a slight downward tilt, the post-recession trend for 5+ permitting is upward. The long-term trend for plexes has a steeper decline than the 5+ multifamily category’s long-term trend.

Again, does this mean the eventual end of new development for 2-4-unit buildings? Not likely. As seen in the following chart, the number of 2-4-unit buildings has been increasing slowly since the Great Recession, along with single-family units. Historically, plex and single-family permitting have tracked closely together (the chart shows only the 1990-present period). However, it is evident that the gap in growth rates has increased between them since about 2013, with the exception of an unusually strong year in 2016 for plexes.


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While the 2-4-unit housing option will not likely disappear, they comprise a shrinking share of total housing options. Competition from the huge increase in rental single-family properties (because of foreclosures from the housing bust) has dampened demand for attached 2-4-unit rentals. Why rent an attached property when you can have a home and yard to yourself? Eventually, some of these single-family rentals will return to the owner market as prices increase and demand continues, reducing the pressure on 2-4-unit rentals.

  

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 July 2017 were: 

  • City of Los Angeles (12,016 units)
  • City of Chicago (9,461 units)
  • City of Denver (8,831 units)
  • City of Seattle (7,567 units)
  • City of Austin (6,859 units)
  • Borough of Manhattan (6,225 units)
  • Borough of Brooklyn (5,960 units)
  • City of Miami (5,933 units)
  • City of Atlanta (5,659 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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