News & Research Listing
Rising rental rates and rampant leasing activity during Q1 2021 indicated that the multifamily housing market is turning a corner. Pent-up demand driven by employment growth and the widespread distribution of the coronavirus vaccine was evident. Increasingly, more renters are becoming comfortable with moving to a new apartment home. According to RealPage, effective rental rates moved from $1,411 in Q4 2020 to $1,421 during Q1 2021. Lower-cost markets with limited apartment stock continued to thrive and outperform major markets. As reported by REIS, San Bernardino, Chattanooga, Memphis, Sacramento and Lexington recorded the highest effective rent growth levels during the first quarter. While gateway markets are starting to see hints of a bottoming pattern emerging, they are still among the nation’s laggards for rent growth. San Francisco, New York City, San Jose, Washington, D.C. and Oakland posted annual rent growth declines ranging from -6.6% to -14.8%.
According to Census, the seasonally adjusted annual rate for multifamily construction starts in February 2021 amounted to 372,000 units, a decline of 27.6% percent year-over-year. Units completed increased slightly by 2.8% to 314,000 units. Multifamily building permits significantly increased by 24.1% to 495,000 units. The top-ranking markets for permits issued during February 2021 included New York (6,821 units), Austin (5,206 units), Los Angeles (3,562 units), Washington, D.C. (3,464 units) and Dallas (3,284 units). With 652,000 multifamily units in the pipeline across the U.S, competition for renters will continue to be fierce, particularly among the class A stock.
The ramp up in vaccinations, the passage of the $1.9 trillion American Rescue Plan (ARP) and other strong economic indicators caused many economists and analysts to substantially increase their employment and GDP forecasts, most of which exceed 5% in 2021. Some of the larger investment firms are forecasting 2021 GDP growth in the 8% range, a rate of growth not seen since 1950. The Federal Reserve has one of the more optimistic forecasts for the labor market with a 4.5% unemployment rate projected by the end of 2021.
The final jobs report of 2020 was a glaring reminder that the economic recovery may remain on shaky ground for months to come. Only 245,000 jobs were added in November, bringing the total jobs recovered to 12.3 million out of 22.2 million lost earlier in the year. Increased infection rates have typically led to business closures and/or capacity reductions, meaning the labor market will continue to struggle until the virus is firmly under control. While vaccines will go a long way toward economic recovery, lack of public confidence in their safety may undermine their impacts. 
Forecasts for apartment fundamentals for predominantly institutional-grade properties indicate a bottoming of the market in late 2020 and into 2021. On an annual basis, rent growth is positive albeit muted while occupancy rates post slight declines before ticking up in 2022. New supply forecasts range from 300,000 – 400,000 units in 2021 as construction delays because of the pandemic and downturn cause timelines to get pushed into next year. Apartment owners and operators are preparing for a challenging 2021, budgeting for declining revenues and increasing costs, both on the operating side and for capital expenditures. 
After trending steadily upwards for two and a half years, the homeownership rate dropped for two consecutive quarters this year before rising in the third quarter back to its Q4 2018 level of 64.8 percent. Census Bureau figures reveal that the largest increase in homeownership over the past year occurred among younger Gen X-ers aged 40 to 44, a 2.6 percentage point shift. The greatest decrease this past year was among mostly older Millennials (35 to 39 years of age), which dropped a full percentage point. Moody’s Analytics’ forecast keeps the homeownership rate under 65 percent over the next several years, well below the peak of 69.2 percent in 2004.
Private sector apartment data providers are in agreement with slipping occupancy rates in 2020 and 2021 and rent growth progressively slowing over the next two years. But occupancy rates dropping from near-all-time highs certainly does not portend doom. Rent growth below two percent, when inflation is forecast between 2 to 2.5 percent is noteworthy, however. In addition to focusing on alternative sources of revenues, owners and operators will need to bump up efforts to reduce operating expenses, a challenging prospect amid the current environment of mounting property taxes and rising wages.
To meet growing demand, America needs to build at least 4.6 million new apartment homes at all price points by 2030. In addition, as many as 11.7 million older existing apartments could need renovation during the same period.
These projections come from a new study commissioned by the National Apartment Association (NAA) and National Multifamily Housing Council (NMHC) and conducted by Hoyt Advisory Services (HAS).
“It’s important to note that this number excludes the supply-demand imbalances already existing in some markets,” said Paula Munger, NAA’s Director of Research and Industry Analysis.
The study attributes this increased demand to:
- The rise of young adults ages 18 to 34 as the largest generational demographic group and who are delaying homeownership;
- The aging population who are choosing the convenience of apartment living; and
- Immigration, which is predicted to account for about half of all new U.S. population growth through 2030.
- Demand for apartments is at an all-time high as the number of renters has reached an unprecedented level. Nearly 39 million people in the United States — that is almost 1 in 8 — call apartments home. This demand:
- Puts significant pressure on the apartment housing industry to meet their needs.
- Makes it challenging for millions of families nationwide to find quality rental housing they can afford at their income levels. Underlying the affordable rental housing shortage is an income problem.
Meeting projected demand means building more than 325,000 new apartment homes each year on average — a number the industry has not been able to hit for decades. From 2012 through 2016, the apartment industry built, on average, only 244,000 new apartment homes per year. The last time the industry built more than 325,000 in a single year was 1989.
Annual growth in renter households exceeded one million on average over the past five years, which is a record amount. Meanwhile, apartment vacancy rates as measured by RealPage Research fell or remained the same for seven straight years from 2009 to 2016.
At the individual Metropolitan Statistical Area (MSA), demand was ranked by both sheer number of apartment units needed as well as the percent increase of new apartments over the current stock. New York, Los Angeles, Dallas-Fort Worth, Chicago, Washington, D.C., and Houston each need over a half-million units over the next 13 years.
The fastest growing markets include Raleigh, Orlando, Austin, Charlotte and Las Vegas, each of which is projected to need apartments totaling 40 percent and greater of their current supplies.
“Even though we’re hearing about some markets potentially in an oversupply situation now, it’s typically occurring at the higher end of the market,” Munger said. “Keep in mind that we’re talking about apartments at all price levels, and that the research spans 13 years and even assumes two recessions.”
Net in-migrations, both foreign and domestic, are forecast to increase substantially in all of these cities, thanks to strong economies and healthy job growth. Professional services lead the growth with Raleigh and Charlotte also relying on their trade sectors, while Orlando continues to augment its leisure and hospitality sector. Austin’s growth is strong across most sectors, and even Las Vegas, historically reliant on the gaming industry, is showing signs of slowly diversifying its economy.
One main driver of future demand—immigration—is a hot topic in the media with reports of deportations and other crackdowns seemingly daily. As depicted in the chart, immigration is projected to slip below one million persons from 2017-2020 before picking up again in 2021 through 2030. Immigration comprising half of population growth is not unusual, and occurred during the 1990s.
As renting becomes more and more of a lifestyle choice, and not just an economic one, apartment demand will be driven by all age cohorts at every income level. Building 4.6 million new apartment homes by 2030 at all price points will go a long way in ensuring this demand is met.
Hoyt’s study covers an estimate for future apartment demand in the United States, the 50 states and 50 metro areas including Washington, D.C. The study defines apartments as units in buildings containing five or more rental units. The data and the Hoyt report, U.S. Department Demand—A Forward Look, are available at www.WeAreApartments.org, a website jointly owned by NAA and NMHC.
Study Ranks Cities Based on Their Ability to Add New Apartments
Honolulu, Boston, Baltimore, Miami and Memphis are the most difficult cities to add necessary new apartments, according to new research from Hoyt Advisory Services, commissioned by NAA and NMHC. The research examines and ranks 50 metro areas based on specific factors, including local regulations and the amount of available land to develop.
The research also shows that the easiest cities to build new apartments include New Orleans, Little Rock, Kansas City, Indianapolis and St. Louis.
The ranking, titled the Barriers to Apartment Construction Index, scores the metro areas along an index that reaches as high as 19.5 in the most difficult market to add apartments (Honolulu) to -5.9 in the easiest (New Orleans). While real estate is project specific, any score above the median of 1.8 means that it is harder to add new apartments than other metros.
There is strong correlation between the difficulty of adding new supply and affordability, as measured by the percentage of households spending 35 percent or more of their income on rent. Nearly half of residents in Miami, Honolulu, Riverside and Los Angeles are in this category, and these markets are some of the most difficult in which to add new supply.
Among the nation’s top apartment markets, cost increases for some construction materials, combined with a construction labor shortage, are placing hiring and development pressures on industry firms.
It’s conference season! And I did my part by attending three of them within a span of 10 days. At each one, I heard this same sentiment from apartment industry developers, owners and operators, large and small, hailing from the Northeast to Southern California.
Outside of land, the key components of construction costs are labor and materials. First, the materials. The recently-released Producer Price Index (PPI) reported a 0.8% year-over-year increase in September in all inputs to construction, slightly larger than the total PPI increase for all goods and services of 0.7%. In terms of processed goods essential for construction, of which there are too many to list, concrete, gypsum, cement and lumber have all increased significantly in one year’s time. Price declines for items such as copper and asphalt have partially offset those increases. 
Now, the labor. Last week, the Bureau of Labor Statistics reported the first ever decrease in the Employment Cost Index (ECI) for compensation, wages and salaries in the construction industry. So what gives? Aside from the fact that one quarter’s worth of data does not constitute a trend, the ECI, like the PPI, is mainly a national index – and real estate is a local business.
So let’s get local, and take a closer look at labor costs, specifically median hourly wages for construction workers in some major metropolitan areas as of 2015 (the most recent data available). Seventy percent of the top 10 apartment markets, based on number of units, exhibited wage premiums in construction compared to other industries. In Chicago, a construction worker can earn almost double the overall average earning rate, with New York and Los Angeles about a third more.
Expanding the field to the top 20 apartment markets, seven stood out with construction industry wage growth significantly outpacing all other occupations: Boston, Dallas, Philadelphia, Houston, Austin, Phoenix and Washington, D.C. With the exception of Austin, the supply of construction workers in these markets still fell short of pre-recession levels.
Fast forward to September of 2016, and average monthly employment is showing some improvement with Dallas and Boston finally recovering all construction jobs lost during the recession. Phoenix and Washington, on the other hand, are still missing more than 100,000 jobs combined. Like many other industries in this tight labor market, there is a mismatch between available positions and available workers.
According to a recent survey of nearly 1,500 contractors by the Associated General Contractors of America, 69% reported difficulty filling hourly craft positions, particularly carpenters, electricians, roofers and plumbers. Not surprisingly, 48% of survey respondents reported increasing base pay in order to attract these skilled workers. Over half of the contractors do not expect any relief over the next 12 months, so if classic supply and demand fundamentals play out as they should, expect labor costs in the construction industry to continue to rise. Of course, that all depends on which market you’re in.
Paula Munger, Director of Industry Research & Analysis
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