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Will Market Fundamentals Support Much-Needed Apartment Construction?

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Spurred onward by population growth and the increasing unaffordability of home purchases on flat wages, apartment household growth will grow in the double digits through 2030—and nearly 4.6 million new apartment units will be needed to fill multifamily demand by that time. That’s according to a new study by the National Apartment Association and the Multifamily Housing Council, which has sourced data and analysis from the U.S. Census Bureau, Hoyt Advisory Services and Axiometrics.

Between now and 2030, approximately 328,000 new apartments should be built annually to keep pace with demand, the study found.

To fill that requirement, builders would need to continue the gangbuster pace of multifamily development that’s made some lenders weary of the sector over the past couple of years. In 2016, about 315,000 new units were completed, according to Freddie Mac’s Multifamily 2017 Outlook: Positioned for Further Growth. The figure is 2% higher than in 2015. Multifamily starts, however, were down 3% in 2016 compared to 2015.

“While the number of new deliveries is high from a historical perspective, it falls short of expectations, given that multifamily starts have been at or above 300,000 since 2013,” researchers at Freddie Mac write. “Construction can stay at these levels as demand fuels development. The slowing of construction permits and starts in 2016, however, is a sign that the market is not overheated and developers are adjusting plans responsibly.”

Strong labor markets were a definite boon for multifamily in 2016, with Freddie Mac finding that 1.2 million new households were formed. Of that number, 630,000 households chose to rent.

But whether 2017 is as robust for labor remains to be seen. Reporting on BLS data in early June, Reuters said that the job market appears to be slowing in momentum, and economist reactions were mixed on the latest employment gains data.

For 2017, moderation is the word, according to Freddie Mac. “At a national level, multifamily completions are expected to be higher in 2017 than in 2016 but will continue to enter the market at a disciplined rate. As a result, vacancy rates will increase modestly in 2017 and are expected to breach 5 percent for the first time since 2011, although remain below the historical average,” the agency notes.

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