Apartment Boom Riding Two-Decade High

November 24, 2014

Despite a 15.5 percent drop in multifamily construction last month, the apartment sector is still roaring strong this year. Multifamily construction has moved higher than its last previous peak in 2006. Indeed, construction of multifamily housing units is at its strongest pace since 1989.

Furthermore, the share of multifamily buildings—those with five units or more—being constructed as rentals is at its highest since 1974, when tracking began. In the previous peak in 2006, the majority of multifamily buildings were being constructed as condominiums and not as rentals. 

Could the sector be overheating? 

“We are definitely not seeing overbuilding at this point,” Ric Campo, chairman and CEO of Camden Property Trust, said during an interview recently at REITWorld 2014: NAREIT’s Annual Convention. While construction is at peak levels compared with the recent past, the new supply is acting to replenish the dearth of building that occurred during the financial crisis. Campo placed that deficit at between 400,000 and 500,000 apartments nationwide. 

Nevertheless, the multifamily sector may be showing some signs of leveling in the near future. The latest Multifamily Production Index—which measures builder and developer sentiment about current conditions in the apartment and condominium market—showed a reading of 54 in the third quarter, a drop of four points below the previous quarter, according to the National Association of Home Builders. A reading of 50 indicates that more respondents report conditions as improving than getting worse. 

“We are seeing the MPI return to the mid-50s level where it has been for much of the past three years,” says NAHB Chief Economist David Crowe. “The moderation in multifamily builder sentiment aligns with a leveling off in production at a historically high level sufficient to keep up with rental demand.”

Source: “Rental Apartment Construction Is at a 27-Year High,” The Wall Street Journal (Nov. 20, 2014); “Camden’s Campo: No Evidence of Overbuilding in Multifamily Sector,” REIT.com (Nov. 20, 2014); and the National Association of Home Builders