While much fuss has been made in the news lately about price drops in the single-family housing market, the multi-family housing market has taken a few blows of its own. Over the past year, multi-family inventory has risen while prices have dropped, especially in markets where speculative buying was popular. This change is occurring after a heady time in the multi-family market. According to management consulting and investment banking firm FMI Corp., Raleigh, N.C., the median price of condos rose at a higher rate (57%) than the median price of single-family homes (25%) between 2001 and 2004.
Previously, sales of multi-family homes had been driven by several factors, including the recent trend of condo conversions, short-term investment properties, and private owners turned landlords who can both live in the home and rent out the remaining units.
According to Reed Construction Data's “U.S. Construction Outlook 2007-2008,” the current multi-family slowdown is the result of financial mismanagement rather than a weak job market or high credit costs. The report predicts that the slowdown will be severe for condos but perhaps not for apartments. Overall, the multi-family surplus is expected to last well into 2007 before it is fully absorbed.
“Last year, the condo market crashed along with the single-family homes, but the apartment rental segment still grew since people have to live somewhere,” says Jim Haughey, director of research & analytics for Reed Construction Data, Norcross, Ga. “Typically, the single- and multi-family markets have an inverse relationship. As the single-family housing market drops, the multi-family market gains in terms of rentals.”
Immigration is a big factor fueling the apartment rental segment of multi-family because “due to cost, an immigrant's first home tends to be a rental rather than a purchased home,” notes Heather Jones, construction economist at FMI. “We're looking at a massive amount of immigration over the next several years, so the growth in the apartment segment will continue.”
Jones points out that in 2006 the multi-family housing sector had expected a large downturn but instead registered a mild growth of 1%. “But the market was coming off of huge gains from the past several years,” she said. “Now, I see the multi-family market improving with 5% growth in 2007 and possibly 7% in 2008.”
The multi-family market has not suffered as large of a drop as its single-family counterpart because mortgage rates are still reasonable and the softening of price due to surplus inventory makes it an attractive option for first-time home buyers. Conversely, the multi-family market also includes luxury condos and townhouses that tend not to be affected as much by factors like mortgage rate increases.
“In 2007, we will see the condo segment sink in the early part of the year and then inventory will wallow,” says Haughey. “This is mostly a catch-up with conversion of surplus apartments to condos and the completion of multi-unit investment properties in resort areas. Overall, construction spending for multi-family homes will remain firm. There are no tax changes in the near future, and interest rates are steady.”
Regional factors also play a role in the multi-family market. “There is more demand in the South and Southwest; and anywhere that is land-starved with dense populations,” says Jones. “They tend to build up because they can't build out. Urban revitalizations are also adding condos onto the market in mix-use development.”
Haughey agrees that multi-family development is significant in urban centers and older cities as well as resort markets such as: Las Vegas; Tampa, Fla.; Miami; and Myrtle Beach, S.C. He also notes there are often construction starts that are never finished on massive investment complexes that include hundreds of condos. “Those that are completed release several hundred units onto the local market that depresses price and leads to a regional surplus,” he explains.
According to new data from the American Housing Survey (AHS) for the National Association of Home Builders (NAHB), the segment of the multi-family market occupied by Americans age 55 or older is growing. “There were an estimated 41.8 million households headed by someone age 55 or older in 2005, accounting for 36.8% of all U.S. households. Those figures are expected to increase to 53.2 million and 41.7%, respectively, by the year 2014.” As the population ages, the uses of multi-family housing is expected to change as well.
Although the multi-family market looks to remain fairly stable in 2007, Haughey points out that there may be a surprise on the horizon. “One less-thought-of option is manufactured homes,” he says. “It is an inexpensive alternative to a condo or apartment, and recent quality improvements have heightened their image. A rise in manufactured housing would add affordable homes on the single-family market and cut into the multi-family market.”