NAHB analysis of multifamily construction permits over the last four quarters indicates relatively higher growth rates in less populated areas. A prior post reviewed the newly released Home Building Geography Index (HBGI) through the perspective of single-family permit activity. This post examines multifamily construction as classified into the seven HBGI regional geographies, as differentiated by urban density.
Economic theory suggests that apartment construction should expand first in high population, high land-cost areas and then move to lower-cost markets over the course of a business cycle. These trends are in fact reflected in recent data from the HBGI. As of the first quarter of 2019, 40% of apartment construction was in large metropolitan area core counties, with another 26% in large metro suburbs and an additional 21% in small metro cores (a large metro area is one with a population of more than one million). The remaining 13% was spread out across exurbs, small towns, and rural areas.
However, first quarter 2019 data show some apartment construction moving to outlying areas of lower population density. For example, looking at the four-quarter moving average of year-over-year growth rates finds declines for construction growth in those areas where most of the construction takes place: large (-1.2%) and small (-0.2%) metro core areas and large metro suburbs (-4.4%). In contrast, double-digit gains for growth were recorded in the exurbs, small city suburbs and some rural areas. These gains can be seen in the following chart.
That said, challenging housing affordability conditions at the end of 2018, which slowed single-family construction, had an impact on where apartment construction is taking place. First quarter 2019 data shows signs of limited reversal of the prior four-quarter trend. Core counties of large and small metro areas posted a quarterly increase (first quarter 2019 compared to first quarter 2018 permit activity), as demand for rental units increased going into 2019.