Lack of Small Apartment Buildings Could Drive National Housing Shortage for Decades

Article originally posted on CoStar on June 21, 2021

Production of Small Multifamily Buildings Fell 75% Over the Past 20 Years

Homebuilding has trailed population growth in all U.S. cities including Los Angeles. (Carol M. Highsmith/Department of State)

The nation’s estimated shortage of at least 5.5 million affordable housing units, particularly apartments, is projected by the largest real estate group to take two decades to close without action from developers and policymakers focused on middle- and lower-income Americans.

A severe lack of residential development that has trailed population growth since 2001 created a gap of 5.5 million to 6.8 million housing units of all kinds, including rentals, says real estate economics firm Rosen Consulting Group in a report for the National Association of Realtors, an industry lobbying group. The findings build on similar rent increase data emerging in CoStar research and the latest conclusions of national housing advocates.

“The scale of underbuilding and the existing demand-supply gap is enormous and will require a major national commitment to build more housing of all types,” according to the analysis.

The most dramatic decline in production has been in two- to four-unit multifamily buildings, which fell by almost 75% during the past two decades, compared with the long-term average from 1968 to 2000, according to the findings. That’s led to a “large undersupply of what were historically more affordable homes and apartments, further exacerbating the affordability crisis across the country,” the analysis states.

While the initial findings are compelling, when analyzed, the often-overlooked solution of widespread construction of more affordable apartment buildings that may generate lower rental returns for investors than high-end units can appear daunting. The report comes as affordable housing emerges as a central issue following the pandemic and its economic fallout, including higher unemployment and an eviction moratorium that some landlord advocates argue was unsustainable.

These events, as well as yearslong sociopolitical issues such as raising the federal minimum wage, have revealed an economic fragility among the nation’s renters and would-be homebuyers. Put another way, the mounting supply problem in an already precarious rental and buying market could make a complicated issue even more pressing. Already, housing affordability concerns in California, the state with the largest homeless population, are sparking legislative proposals aimed at addressing the issue to help spur more building.

Developers would need to build more than 2 million housing units per year over the next 10 years to fill the gap, the report says. That would equate to a 60% increase in housing starts each year, relative to the almost 1.3 million homes that were built in 2020, according to the report.

It notes that if building were to continue at its current pace of a seasonally adjusted annual rate of about 1.7 million — the most rapid pace in more than a decade — it would take more than two decades to close a housing gap of 5.5 million units.

The report falls generally in line, albeit slightly more conservative, with other estimates of the nation’s housing shortage by groups that follow the issue closely. The National Low Income Housing Coalition, for instance, estimates that the United States is facing an affordable housing shortage of more than 7.2 million units.

Overall, the lack of supply has helped push housing prices higher, putting existing housing even further out of reach for lower- and middle-income residents. The average apartment rent in the United States increased to $1,401 per unit in the first quarter of 2021 compared to $1,079 per month in the first quarter of 2011, according to CoStar research.

21st-Century Concern

The nation’s housing shortage is a relatively new phenomenon, created this century. Between 1968 and 2000, the total stock of U.S. homes grew an average of 1.7% annually. But between 2000 and 2010, the nation’s housing stock grew by 1%, and by just 0.7% between 2010 and 2020.

From 2001 to 2020, the average annual gap in multifamily housing production for structures with at least five units was 120,000 units, compared with the long-term average from 1968 to 2000, or a cumulative gap of almost 2.4 million multifamily units, the report said.

“In addition to the for-sale housing market, renter households faced severe negative consequences from the past two decades of underbuilding,” reads the report. “Even before the large financial burdens placed on renters by the COVID-19 pandemic, more than 40% of renter households were cost burdened, while nearly one quarter were ‘severely burdened,’ or spending more than 50% of their income on housing.”

Overall, housing development largely slowed because of a combination of a lack of public investments in housing and an underbuilding of homes that now affects all regions of the United States, according to the report titled “Housing is Critical Infrastructure: Social and Economic Benefits of Building More Housing.”

The growing imbalance sparked a national push toward recognizing housing as infrastructure beginning years ago.

While the sentiment is partly an effort in rebranding, housing advocates argue the change would represent an acknowledgment that reliable housing is just as important to a city’s success as public roadways, highways, sewage systems and other public developments.

“We firmly believe that housing, in the right location, is a better infrastructure investment than federal funding of high-speed highways,” Cheryl Cort, policy director for the Washington, D.C.-based community-focused development organization Coalition for Smarter Growth, said in an interview with CoStar News in January.

She added that building more housing in cities can create a ripple effect of less dependence on roadways, lower rates of homelessness, improved overall public health, easier access to jobs and more walkable communities.

Federal Investment Considered

The Biden administration has been working to finalize a significant investment in affordable housing. In May, Housing and Urban Development Secretary Marcia Fudge unveiled that, as part of President Biden’s $2.3 trillion infrastructure proposal, $318 billion would go toward investments in housing.

But in recent weeks, the $2.3 trillion plan has been cast aside in favor of a roughly $1 trillion, more bipartisan infrastructure plan that is still being negotiated between members of the House and Senate.

The report recommends a number of policy changes that would address financial and bureaucratic barriers that contribute to the lack of development.

It suggests expanding resources and programs that address a shortage of financing for affordable housing development as well as using federal resources to tackle construction challenges such as rising material costs and labor shortages.

Other recommendations include incentivizing local governments to change zoning and regulations that would allow for increased housing development and encourage the transformation of some underused commercial space into housing.

“Perhaps most importantly, addressing the national underbuilding gap will require a coordinated approach to planning, funding and development of all forms of infrastructure to not only build more housing, but also build better housing that will be more inclusive and well-integrated into local communities,” reads the report.

It notes that “mechanisms to achieve these goals include strengthening and expanding the existing Affirmatively Furthering Fair Housing framework, a comprehensive recognition of the need for genuine community engagement in all types of infrastructure development and systematic adoption of planning tools such as fair housing and equity impact analyses.”

“Additional public funding and policy incentives for construction will very clearly provide huge benefits to our nation’s economy, and our work to close this gap will be particularly impactful for lower-income households, households of color and millennials,” National Association of Realtors President Charlie Oppler said in a statement.

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