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Rising construction costs are making multifamily developers a little queasy about the market

The Multifamily Production Index inches backwards to 48

Rising construction costs contributed to multifamily developers’ confidence weakening further in the fourth quarter of 2018, according to the National Association of Home Builders.

According to the organization’s latest Multifamily Production Index, the MPI inched backwards one point to 48 compared to the previous quarter. The MPI is measured on a scale of 0 to 100, with a number above 50 indicating that more respondents report conditions are improving than report conditions are getting worse.

The MPI is broken down into three components: the construction of low-rent units, apartments that are supported by low-income tax credits or other government subsidy programs; market-rate rental units, apartments that are built to be rented at the price the market will hold; and condominiums.

According to NAHB’s report, all three components of the MPI fell below 50 in the fourth quarter. Notably, this is the second consecutive quarter that the MPI has declined below 50.

 “The MPI is down a point and under 50 for the second straight quarter, indicating a slight weakening for multifamily developer sentiment," NAHB Chief Economist Robert Dietz said. "This is in line with our 2019 forecast that multifamily starts will level off and edge down slightly from last year's very solid rate of production."

The component measuring low-rent units worsened, retreating 11 points to 48, however the component measuring market rate rental units rose three points to 49, and the component measuring for-sale units moved forward five points to 44.

The NAHB report also details the Multifamily Vacancy Index, which measures the multifamily industry’s perception of vacancies. The MVI is a weighted average of current occupancy indexes for class A, B, and C multifamily units, and can vary from 0 to 100. In the MVI, any number over 50 indicates that there are more property managers reporting more vacant apartments.

According to the report, the MVI rose two points to 45, returning to Q2 levels.

"We saw a big drop in the component for low rent starts, even though that is the segment of the market where demand tends to be the strongest," NAHB Multifamily Council Chairman Steve Lawson said. "Rising construction costs and difficulty with getting projects approved have made building particularly challenging in some parts of the country."

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