When you think about the multi-family housing market over the last several years, the thought of condos almost certainly comes to mind — and rightly so. According to the National Association of Home Builders (NAHB), the recent surge in condominium development in the United States represented half of all new multi-family units (apartments, condos, and townhouses that are not separated from adjoining units, such as those with a firewall) built in 2005.

Characterized as “the fastest growing market” tracked by McGraw Hill Construction (MHC) last year, multi-family housing jumped 24% above 2004's level to $64 billion, according to ENR's “Forecast for 2006.” In this report, Robert Murray, MHC's chief economist, predicts 2006 will see a slight bump of another 4%.

“The value of the amount spent, including land, on multi-family construction represented a 21% increase from 2004, even though the number of units didn't really go up at all,” says Michael Carliner, an economist with NAHB. “That trend reflects several things: The fact that a much larger share of the market is made up of condos; the fact that construction and material costs went up; and the fact that more multi-family construction is occurring in high-cost areas.”

Historically, multi-family construction numbers have been very volatile, explains Carliner, pointing out that the total of national multi-family starts used to fluctuate between 30% to 40% per year; however, since 1997 there's been virtually no change. “Despite the fact that the total has been almost constant, there's been a big shift in the mix of construction, particularly a big increase in condo construction and a decrease in rental,” Carliner says. “The supply of condos in the pipeline that are still under construction represents a huge increase compared to two years ago — probably more than the market can absorb.”

That will inevitably spell slowdown for condo and apartment construction in certain regions in 2006 (see Table). After tracking what has transpired in the multi-family market over the last several years, this trend doesn't surprise Carliner. “New condos were being absorbed very quickly, and the price of existing condos have been going up faster than the price of existing single-family homes in some cases,” he says. “If you take both the new construction plus conversions, the market has increased up to 500% from two years ago — that's just too much to absorb.”

Analysts at FMI Corp., Denver, agree that the multi-family sector was overbuilt in the mid-1990s. Nevertheless, its “2005-06 U.S. Markets Construction Overview,” still characterizes the market as healthy. Fueled by echo boomers (children of baby boomers), immigration, and low rates of interest on the investment, the report reveals that the value of multi-family housing construction should reach $51 billion in 2006 despite the surplus. Growth in the condo market, reports FMI, will be driven by pricing rather than new starts. For example, the national median price of a condo ($223,500) in June 2005 was actually higher than that of a single-family home, reports the National Association of Realtors. Similarly, between 2001 and 2004, single-family homes appreciated 24% while condos soared at 57%.

“This segment is driven by economic and demographic variables so it tends to be cyclical,” says Heather Jones, a construction economist with FMI. “Downtown revitalizations are driving both condo and apartment buildings. Condo development has recently been propping up the segment and will continue to do so in many areas, especially the South.”

Jones expects starts to fall slightly but projects that put-in-place construction will continue to grow based upon higher labor and materials costs, higher end materials, and more luxury upgrades. “Single- and multi-family housing tend to be slightly inversely related,” she says. “When mortgage rates are low, single family is up. As mortgage rates rise, apartment occupancy rates increase, driving new construction. Of course, ‘a rising tide raises all boats,’ so in the booming housing economy that we have been in, both segments have been increasing.”