It’s Raining Multifamily

Article originally posted on Globe St. on March 8, 2023

But There’s Good News as the New Supply will be Quickly Absorbed.

“It’s Raining Men,” so the 1980s song by the Weather Girls went. More than 40 years later, what’s raining is multifamily units.

In a research brief, CBRE forecasts that 716,000 multifamily housing units will hit the market over the next 24 months. The sector’s overall vacancy rate will swell above the current 4.6% equilibrium vacancy rate to 5.2% by this year’s end. Overall, there are 750,000 under construction, which is the most since the 1980s.

“This may come as a surprise to some, since the U.S. currently has an overall housing shortage—nearly all of which is in single-family homes and not multifamily units,” the brief notes. “CBRE expects that demand for rental housing will gain momentum this year as vacancy peaks only slightly above its long-run average of 5.0%.”

As you might expect, most of these new units are focused on areas that have seen the major share of demographic shift — patterns that were already in play a number of years before but that accelerated with the onset of the pandemic.

But CBRE thinks that ultimately the market will work out for property owners.

“This current wave of construction is expected to expand the nation’s total multifamily inventory by 4.2%,” they wrote. “Although the multifamily market has recorded negative net absorption over the past three quarters, we expect demand will turn positive in the first half of this year and limit the extent to which rising vacancies could significantly slow rent growth. We forecast rent growth of 3.5% for the year, down from 6.7% in 2022 and 13.4% in 2021 but still relatively healthy when compared with the long-run average of 2.5%.”

CBRE says that potential for construction delays due to lack of labor could become a moderating factor on unit availability growth. “Early in the current construction cycle (2013) when the pipeline was approximately 300,000 units (less than half the amount today), the time of construction from start to finish averaged 16.5 months. Today, that timeline averages 20.5 months, nearly 25% longer. The biggest jump in that expanded timeline occurred in 2021, when units under construction surged,” the report said.

Once the big rush is over in 2024, according to this analysis, there will still be an ongoing need for 200,000 more units a year to keep supply and demand in balance.

These are national numbers, so one big question is about distribution. According to some National Association of Realtors data analysis, the movement patterns seem to be slowing, which could change the dynamics of where building is needed and where it occurs. Also, Federal Reserve decisions on monetary policy could push rates up higher, which could interrupt building plans as well