Multifamily housing production will temper following several years of robust gains but should remain strong in 2016, according to leading multifamily developers and industry experts at the International Builders’ Show in Las Vegas.
The National Association of Home Builders (NAHB), which hosted the press conference, anticipates about 417,000 multifamily starts in 2016, up 5 percent from an expected total of 397,000 units last year.
Fundamentals looking good
Employment growth, a key driver of multifamily housing demand, should reach 3 million new jobs in 2016 after registering 240,000 per month over the last two years, said NAHB chief economist David Crowe.
This projected increase in employment will enable more millennials, many of whom still live with their parents, to move out and become renters. Crowe said 57 percent of 18- to 24-year-olds now reside with their parents, compared with 47 percent in 2000.
Household formations have finally returned to their historical norm of 1.2 million per year, and even averaged 1.4 million over the past four quarters, Crowe said. But strict underwriting rules for new mortgages will continue to force many millennials into the rental market.
Young people also change jobs more often than their parents did at the same age, Crowe said, which influences them to remain renters and contributes to the higher rents seen in many metropolitan statistical areas.
Labor issues becoming serious
A shortage of qualified workers has driven up construction costs for many multifamily developers, and there doesn’t seem to be any relief on the horizon, said Andrew Chaban, CEO of Princeton Properties in Lowell, Massachusetts.
The construction of a rental unit cost Princeton Properties $193,000 on average in 2012, Chaban said, but just a few years later the same unit cost $250,000 to construct because of the growing labor shortage.
As a result, the company has to pursue $1,800 in rent per month for a two-bedroom unit in suburban Boston just to attract initial investors, Chaban said. The significant demand for multifamily housing calls for more affordable studio and one-bedroom units, he said, but developers are limited in how they can finance those projects.
Affordability being threatened
Tax credits dictate the construction of affordable housing, not supply and demand, said Steven Lawson, president of The Lawson Companies in Virginia Beach, Virginia. The Low Income Housing Tax Credit continues to be the most viable avenue for developers to fund more affordable housing, he added.
Consequently, his company has built a lot of market-rate housing lately, but even those projects are increasingly restricted by new regulations and extensive permitting. Storm water rules, for example, limit where the company can build certain housing types, and they add considerable cost to any project, Lawson said.
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