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Will 2016 Mark the End of the Multifamily Construction Boom?

The National Multifamily Housing Council (NMHC) held its Apartments Strategies Conference and Annual Meeting in Orlando from January 18-21. With over 4,000 attendees, the conference was very successful, but what really caught my attention was the level of optimism amongst this crowd.

Even after several years of steady growth, developers, owners and investors are still very optimistic about continued growth in 2016 and beyond. (In case you missed my 2016 Construction Outlook report, you can find it here.)

Factors Driving Apartment Growth and Decline

December housing starts numbers show 381,000 new units started in 2015, compared to 356,000 in December 2014. That's a 7% increase. On top of that, rent rates continue to increase while vacancies decrease, keeping investors interested in this market segment.

When we take a look at the market fundamentals, a couple of aspects support continued growth in 2016:

1. Unemployment Rate/Job Growth

The unemployment rate is at 5% and has remained low as the economy continues to improve. The forecast is for jobs to continue to be added as the economy grows and with that the demand for housing will continue, especially as we see the millennials finally moving out of their parent’s homes.

There are currently more than 23 million 18-34 year olds living at home, which should create a significant increase in household formations.

2. Homeownership Rate

Even though jobs are improving and the economy is growing, tough lending standards are still keeping people from buying homes, and over two-thirds of the NMHC conference attendees believe homeownership will continue to decrease.

Currently at 63.7%, homeownership could go down as low as 61%. Every 1% decline in the homeownership rate creates an additional 1.1 million renter households, which is great for the apartments industry.

Marcus & Millichap’s Multifamily Investment Forecast report predicts continued growth in the multifamily space, with all “46 markets tracked forecast to post continued employment gains and effective rent growth in 2016.”

In terms of starts, 2016 forecast vary from 405,000 to 480,000 in 2016. See table below:

Forecasting Agency Units (000's)
Raymond James 475
MBAA 413
NAHB 417
NAR 428
Fannie Mae 405
HanleyWood 433

Geographically, the only areas of concern are Houston, TX, and the San Francisco, CA, bay area. Houston is being impacted by the continued drop in oil prices while the bay area is struggling with unsustainable rent rates which - at some point - will drop. However, this will only be an issue towards the end of 2016 or early 2017.

Should We Fear Another Recession?

Another big topic of discussion during the meeting was the possibility of a global recession and it's effects on the multifamily construction market. Some factors giving credibility to a recession are the recent downturns on the stock market, low oil prices, and China's lower GDP growth rates.

While these factors may create some slowdown, the key is to keep looking at job growth. If the U.S. economy continues to move forward and jobs are added, the apartments industry shouldn’t suffer. In fact, some experts believe that if the global economy suffers, it might be good for the U.S. As Craig Leupold from Green Street Advisors mentioned at the conference, “the U.S. is considered a safe haven for investors,” and most likely more investors will want to put their money in the U.S. and foster our internal growth.

Let’s continue to hope for a successful 2016, not only for the multifamily space, but for construction overall. We'll continue to keep an eye on the global economy and its effects in our market. For real time updates and all the latest intel as we contually analyze the industry, subscribe to our bimonthly forecast email.

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