As housing starts numbers surged to 1.07 million units in April, multifamily once again took center stage. Single-family starts increased only 0.3-percent sequentially (to 649,000 units), but a 39.6-percent sequential bump in multifamily starts (to 423,000 units) fueled the 13.2 percent jump in total housing starts.
But the big story was multifamily’s 453,000 permits in April, up 21.8 percent from March. The apartment sector has only seen those kinds of initial permits numbers twice in the last 25 years—June 2008 and January 1990, according to a report from Tampa-based Raymond James and Associates. Both of these numbers ended up being outliers. The last time the sector sustained these types of numbers was in the go-go days of 1986 and 1987 (before a crash sunk the commercial sector for years).
Already, there are fears of a bubble in the frothy apartment sector and April’s report will do nothing to quell those concerns. Rod Petrik, real estate research analyst at Baltimore-based Stifel Nicolaus & Co., thinks demand driven by echo boomers, immigrants, and singles may ultimately mean the market can absorb starts numbers of 400,000 to 500,000 new units per month. But he acknowledges the investors he works with are a bit uncomfortable with the number of apartment units in the pipeline.
“Investors will be fearful until these units can be absorbed,” he says.
The New Normal?
So, far other multifamily market watchers don’t seem too concerned with the numbers. On the starts side Jay Denton, vice president of research with Dallas-based Axiometrics, thinks winter weather-related delays could have pushed many starts planned for the winter out to April.
Ronald Witten, president of Dallas-based Witten Advisors also cites the weather as a reason for the strong starts and says the overall trends look solid.
“Even after this seemingly large one-month total, the actual trailing 12-month total for five-plus starts is just now above 300,000 for the first time in this recovery,” Witten says. “And, 300,000 was a relatively normal run rate in the late 1990s and early 2000s.”
Greg Willett, vice president of research and analysis at Carrollton, Texas-based MPF Research, thinks, with job growth, most urban areas can handle what’s on the way. But he’s optimistic the new units being built could help bridge the affordability gap.
“What we really like in the starts figures for the past few months is greater variety in product getting underway,” he says. “Garden and mid-rise projects in the suburbs are now a meaningful component of the construction mix. It's going to be helpful to deliver units in multiple neighborhoods and at multiple price points, whereas the first round of product completing in this cycle has been so heavy on very expensive urban-core units.”
Single Family Sluggishness
On the single-family side, April permitting picked up only 0.3 percent sequentially and starts rose only 0.8 percent. Single-family permitting rose in the Midwest and South, while seeing slight declines in the West and Northeast.
Raymond James & Associates sees a moderate improvement in the future. “Looking ahead, we think permit activity could begin to trend higher soon, as builders try to catch up with late-season customer traffic that was previously sidelined by severe winter weather,” the company said in a report earlier this week. “That said, we expect any momentum to be marginal at best, with a disproportionate amount of the strengthening in higher price-point communities.”