Apartment Shortage or Bubble?

It's no secret that multifamily apartment development is currently booming, leading some to speculate that it is in bubble territory, much akin to the condominium market of seven years ago. Certainly the recent new supply of apartment units, and the pipeline of units yet to be delivered, underscores the ascertain that we are getting into frothy territory, but simply looking at that statistic alone belies what is actually happening in the market. In contrast to other housing cycles, the recent increase in supply of apartment units is in direct response to increased demand that has yet to be satisfied due to a long-term deficit of units. Another factor, more young people are choosing to rent, and to rent for longer periods, than at any other time.

Currently there are much fewer condominium developments relative to apartment developments; and master planned communities of single-family homes & town-homes are few and far between. Ask any real estate broker today and their biggest complaint will not be a lack of buyers, but a lack of inventory to sell to their buyers. They lack supply from new construction coming online and from current owners trading-up or downsizing. The solution to the realtors inventory shortage is not as simple as developers turning their attention away from apartments and back to condominiums and single-family homes, other factors are at play such as buyers' access to credit and having sufficient down-payments. A very high percentage of homes that are changing hands today are being paid for in all cash, that is, with no mortgage financing required. Therefore much of the pent up demand relators are seeing is from cash buyers. The typical home buyer needing a 20% down-payment and a good credit score is more likely to rent for longer than was the case ten years ago in order to save for the down-payment, repair their credit score, or worse, because they no longer have aspirations of home ownership.

It is very unlikely that there has been a seismic shift away from the typical American wanting to own their own home, and adopting a more Continental European attitude of renting for life, as is the case in Germany. However younger people are getting more comfortable with the idea of renting given the flexibility it offers in terms of relocating due to work, or lifestyle. That being said, recent surveys show that 80% of Americans believe buying a home is a good financial decision, and with the current home ownership rate at 65%, this means many people currently without their own home aspire to own one.

The surge in new supply of apartment units can also be attributed to the inherent build of undersupply of units in recent years. Since the mid 90's approximately 250,000 apartment units were produced per year. This number fell off during the single-family construction boom of the mid-2000's. Also, in the 70's & 80's apartment units made up between 20%-25% of all residential housing starts, and fell off to 10%-15% in the 90's and 2000's. The Federal Reserve expects the current apartment unit production rate of 250,000 units/year to increase to 550,000 units/year by the end of this decade.

Last year about one million new residential units (single-family, condos, apartments, etc.) were constructed. This is still below the long-term average requirement of 1.5 million units a year. Of the one million units produced last year, about a third were in the form of rental units, an all time high. Given the huge fall off in residential construction over the past six years, there is a huge long-term deficit in housing inventory, which is creating pent up demand. This demand will not be fully satisfied by all the new apartment units recently created and in the pipeline. Even when single-family production gets back to normal, it will take a number of years to reach the long-term equilibrium of housing stock requirements, which should therefore counter any risk of an apartment unit bubble being created based on the current unit construction trends.

In conclusion, there remains a shortage of residential housing inventory in all of its forms, be it single-family, condominium or apartments. There are various other factors contributing to the demand side, such as financing and job security. Overall on the supply side we are far from being at the top of another boom cycle in apartments, and just at the beginning of addressing the shortage in single-family home needs.

Construction financing has also played a hand in the recent focus on apartment development. It has been much easier to get financing for an apartment development compared to a condominium or single-family subdivision. Financing is becoming more readily available, particularly when working with a partner like Mulcahy Capital. If you have a development project, or an investment property, in need of debt financing, equity co-investment, or an experienced development/operational partner, please give me a call.