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Multifamily development picks up despite falling demand

Developers banking on demographics and job growth

Over the past few years, renter household formation has outpaced owner household growth, as many young homeowners are being sidelined by unemployment and student debt.

However, recent statistics show that the majority of new renters might not be searching for traditional multifamily housing; instead, they’re renting single-family homes.

According to the latest Housing Insights report from Fannie Mae, single-family rental units represented 51% of the occupied rental stock in 2005 compared to 44.8% for multifamily rental units. Six years later, in 2011, single-family rental units had grown to 54.8% of the occupied rental stock compared to 41.3% for multifamily units.

Despite the decrease in multifamily interest, new multifamily construction has increased steadily during the past two years. In fact, according to a recent Deloitte report, total housing starts rose 35% year-over-year in the first quarter of this year, with multifamily starts up 9.1% to an annual rate of 340,000 units. This has left many wondering why there remains a focus on multifamily development.

The likely answer to this question is demographic changes and job growth. Looking ahead, demographics are favoring the multifamily sector. Experts at the U.S. Census Bureau predict that by 2020, the U.S. population will include 68 million people between the ages of 20 and 34 — the group most likely to rent.

Additionally, job growth among this group appears to be moving forward. While unemployment has kept a number of young adults from buying, an expected rebound in employment among this group has developers anticipating an increase in demand.

According to McGraw-Hill Construction’s Dodge Pipeline, approximately 205,000 apartment units are expected to be complete by the end of this year. Moving into 2014, construction is expected to remain, as another 157,000 multifamily apartment units that are underway are expected to come online.

"We looked at the demographics moving forward; that cohort does keep increasing over the next 10-15 years or so, and I think that’s what the developers are looking at," said Fannie Mae Multifamily Economist Kim Betancourt, who assisted with the report.

Betancourt added that most developers are building smaller apartments in prime locations. "If you take a look at the construction underway in the multifamily space, most of it is happening in the top 10 metros in the country," she said. Most renters who are interested in multifamily fit a specific demographic: Millennials who are looking for temporary housing to sustain them until they are ready to buy their first home. 

"They’re renters for now, but you can't count on it forever because it's more a function of demographics," noted Tanya Zahalak, a multifamily and market research economist at Fannie Mae, and author of the Housing Insights report. She added, "Developers should keep in mind there are a lot of Baby Boomers about to retire."
These Boomers will in turn be looking to downsize from their homes, often looking to the multifamily sector for options. And thus, multifamily developers believe they have nothing to worry about.

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