September 2016 Construction Report

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September 2016 Construction Report

Residential Starts Fall as Multifamily Plunges

Tuesday, November 1, 2016

A sharp decrease in multifamily construction starts caused the annual rate of total housing starts to decline in September, the latest U.S. Census figures show, while single-family starts were the highest in nine months. 

Construction began on 250,000 multifamily units – on a seasonally adjusted annual rate (SAAR) – in September, a decrease of 38.9% from August’s annual rate and 42.5% from the September 2015 figure. Meanwhile, 1.047 million total housing units were started in the 12 months ending in September, down 9.0% from August and 11.9% from September 2015.

Single-family starts increased, however. The 783,000 houses that began construction on an SAAR basis were 8.1% more than August’s annual figure and 5.4% higher than September 2015’s rate of 743,000 units. This is the highest annual single-family starts rate since the 845,000 units in the 12 months ending in February 2016.

Meanwhile, residential building permit issuance was up. Municipal and other authorities issued permits for 1.225 million housing units in the 12 months ending in September (seasonally adjusted), a 6.3% increase from August’s annual rate, and up 8.5% from the September 2015 figure.

  • The 449,000 multifamily permits issued in the 12 months ending in September represented a 17.2% increase over both August 2016 and September 2015.

  • The 739,000 permits for SF homes (SAAR) were up 0.4% from August and up 4.4% from September 2015. Annual SF permits have now exceeded 700,000 units in 15 of the past 16 months.

Other U.S. Census statistics of note:

  • Total annual starts in September 2016 were down from the September 2015 number in the Northeast (-31.5%), South (-15.6%) and West (-4.4%) regions. Starts in the Midwest region were up 6.6% from last year.

  • Multifamily starts decreased in the Northeast (-62.0%), South (-52.3%) and West (-19.5%), but were up in the Midwest (12.0%).

  • Annual single-family starts were up solidly in all regions: West (7.2%), Northeast (7.1%), Midwest (5.4%) and South (4.4%).

  • The annual rate of total permits increased in the Northeast (13.9%), West (13.3%), Midwest (6.4%) and South (5.7%) regions.

  • Annual single-family permits were up across three of four regions. Increases in the Midwest (11.5%), West (5.0%) and South (3.6%) were met by a decrease in the Northeast (-5.5%). The decrease in the smaller Northeast region was only 3,000 units.

  • Annual multifamily permits also were up across three of four regions: Northeast (31.7%), West (34.4%) and South (10.4%). The Midwest region declined only -1.4% from last year, or just 1,000 units.

  • A total of 951,000 residential units were completed in the 12 months ending in September 2016, a 5.8% decrease over the September 2014-September 2015 total. This was the first annual completions total below one million units since April 2016. Annual SF completions were up 6.7%, but multifamily was down -30.4% from 2015.

Permits Down in Many Metros

The top 10 Metropolitan Statistical Areas for multifamily permitting for the trailing 12 months ending September 2016 were:

The first nine of last month’s top 10 returned in the same order. Chicago replaced Orlando at No. 10, moving up from No. 13 in August.

Six of the top 10 metros issued fewer multifamily permits in the 12 months ending in September 2016 than they did the year before. New York’s 421-a bulge – in which developers raced to get permits believing a change in affordable housing regulations was imminent – continued to moderate from its peak, and Houston’s slowdown continued.

Because of New York and Houston’s declines, the annual total of permits issued in the top 10 metros, 140,609, was 20.2% lower than the 176,111 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-38th ranked metros. A year ago, permits issued in the top 10 metros almost equaled the 11th-75th ranked markets.

Access the latest permit trends tables in Excel format here.

Please contact us if you have any questions.

Jay Denton
Senior Vice President
KC Sanjay
Sr. Real Estate Economist
Chuck Ehmann
Real Estate Economist

Is Multifamily Nearing its Peak?

One year ago, we examined the ratio of multifamily (five or more units) 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.

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.

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.

  • City of Los Angeles (12,421 units)
  • City of Dallas (8,773 units)
  • Borough of Brooklyn (8,321 units)
  • City of Seattle (7,807 units)
  • City of Chicago (7,002 units)
  • City of Atlanta (6,846 units)
  • City of Houston (6,514 units)
  • City of Austin (6,286 units)

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

The table below highlights multifamily permitting by place. Some of the top places on a trailing 12-month basis through September 2016 were:

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