Rental Market Continues to Strengthen

June 6, 2013

The most recent data from the Survey of Market Absorption of Apartments (SOMA) showed that completions of privately financed, nonsubsidized, unfurnished rental apartments continued to climb in the fourth quarter of 2012. The reported 31,600 completions in buildings with 5+ units were slightly above the third quarter level and more than doubled since the fourth quarter of 2011. At the same time, the absorption rates (units rented or sold after construction of the property is complete) remained high, close to 65 percent. Averaged over 2012, the apartment absorption rates reached 64 percent, a level not seen since 2001.


The condo and co-ops completions remained at historically low levels - only 1,800 units were completed in the fourth quarter of 2012. However, the condo absorption rates improved remarkably. About 78 percent of the condominiums completed in the fourth quarter of 2012 were sold within three months of completions. This rate is 20 percent higher from the previous quarter and 33 percent higher from a year ago.  Over 2012 the condo absorption rates have averaged around 66 percent, marking the highest reading since 2006. Leaner inventories should bolster condo and co-op construction activity going forward, but we expect these units will maintain a diminished share of overall 5+ multifamily production.


The SOMA also reported that approximately 8,100 federally subsidized or tax credit units were completed in the fourth quarter of 2012. This represents a decline of 3,400 units since the previous quarter and 4,100 since a year ago.


Apartment Production Spikes to an Unsustainable Rate

April 17, 2013

The Census Bureau’s preliminary estimate for starts in buildings with five or more apartments in March came in at a massive (seasonally adjusted annual) rate of 392,000 units.  In the Census construction report, this shows up as a 27 percent increase over February.  However, the number for February was itself revised upward by 24,000—so the five-plus starts rate for March is actually 38 percent higher than the production rate we thought prevailed a month ago.

MF Starts through March

At 392,000, the five-plus starts rate is the highest it’s been since January of 2006 (a one-month anomaly that at the time was explainable as the industry’s response to changing building codes in some states).  Even if we smooth some of the volatility out of the five-plus starts series, the 3-month moving average is up to 325,000.  That’s above the annual number of five-plus starts in any year since the 1980s, so even the current moving average seems a bit too high to sustain going forward—a contention supported by the permit numbers in the latest construction report.

The report shows that, in March, the (seasonally adjusted annual) rate at which new five-plus permits were issued dropped 8 percent to 283,000, while the number of five-plus permits waiting in the pipeline (previously issued but not yet converted to starts at the end of the month) declined 19 percent, to 38,400 (not seasonally adjusted).

Immigrant Workers in Construction

April 2, 2013

A new study from NAHB Economics examines where construction workers come from by analyzing the most recent 2011 American Community Survey (ACS). The results show that immigrants have been an important source of new recruits to the construction industry—accounting for 22 percent of the overall labor force. The inflow of foreign born labor into construction is cyclical and coincides with the overall housing activity. Their share was rising rapidly during the housing boom years when labor shortages were widespread and serious. But even during the severe housing downturn and a period of high unemployment the construction labor force continued to recruit new immigrants to partially replace native and foreign born workers leaving the industry.

Particularly, immigrants are concentrated in some of the trades needed to build a home, like carpenters, painters, drywall/ceiling tile installers, brick masons, and construction laborers – trades that require less training and education but consistently register some of the highest labor shortages in the (HMI) surveys. The two most prevalent construction occupations, laborers and carpenters, account for about 30 percent of the construction labor force. More than a third of all construction laborers and one out of four carpenters are of foreign born origin. Immigrants account for almost half of drywall/ceiling tile installers and tapers, a trade where 44 percent of workers do not have a high school diploma. More than a third of all carpet/floor/tile installers and painters did not finish high school, immigrants account for 43 percent of workers in these occupations.

 The immigrant presence in construction trades that require more years of education and advanced skills looks less relevant. The trades with low presence of foreign born labor, such as electricians, construction and building inspectors, first-line supervisors, elevator installers – tend to recruit better educated workers. Only 4 percent of construction and building inspectors and 7 percent of electricians did not graduate from high school.

 It turns out the trades with high concentration of immigrant workers also tend to have more vacancies and labor shortages. According to NAHB’s monthly Housing Market Index (HMI) surveys, construction trades with the most consistent labor shortages are framing crews, carpenters and bricklayers. About 30 percent of surveyed builders were still reporting some shortages of labor in these trades in June 2012, even though the shortages were not nearly as severe as in the midst of the housing boom. Nine months later, in March 2013, reported labor shortages got worse across all trades but particularly among framing crews and carpenters, with more than a half of respondents reporting shortages of framing crews and carpenters-rough subcontractors.

The study further shows that the distribution of immigrant construction workers is not even across the US, with some states drawing more than a third of their construction workers from abroad. States that traditionally rely on foreign born labor but lost its significant share during the housing downturn – such as Arizona, California, Colorado, Florida, Nevada, and Georgia – are most likely to experience difficulties in filling out construction job vacancies once home building takes off.Imm_figures

Multifamily Starts: A Little Stronger than We Thought Last Month

March 21, 2013

For February of 2013, the Census Bureau’s preliminary estimate for starts in buildings with five or more apartments came in at 285,000  (at a seasonally adjusted annual rate).  In the Census construction report, this shows up as less than a 1 percent increase from January, but the January number itself was revised upward by nearly 9 percent—so 285,000 is  actually 9.6 percent higher than the preliminary starts rate for January originally reported in last month’s blog.

Feb 2013 MF Starts

Although well below the anomalous spike of December, the February 2013 five-plus starts rate appears strong compared to any other month from recent history (the same general pattern seen in total housing starts).

Another interesting statistic in the February 2013 construction report was the (seasonally adjusted annual) rate at which new five-plus permits were issued during the month.  The new five-plus permit rate increased  7.5 percent to 316,000—which at first may not seem terribly dramatic, but is up nearly 55 percent year-over-year and the highest the five-plus permit rate has been since July of 2008.

The number of unused previously issued five-plus permits remaining in the pipeline at the end of the month also remained relatively healthy at 47,700 (not seasonally adjusted)—up 2.7 percent from January and 46.4 percent year-over-year.  Overall, the permit numbers have been strong enough to support a five-plus starts rate as high as February’s 285,000 over the next couple of months.

Multifamily Production Index Shows More Improvement

March 13, 2013

In the fourth quarter of 2012, NAHB’s Multifamily Production Index (MPI) increased two points to 54, marking the fourth straight quarter the index has been over the key break-even point of 50.  The MPI is an overall measure of builder and developer sentiment on current conditions in the apartment and condominium market.

The MPI is built from three components, capturing industry sentiment on production of low-rent, market-rate rental, and “for-sale” units (or condominiums). Each component lies on a scale of 0 to 100, where a number over 50 means more builders say conditions are improving than say they are getting worse.  The MPI typically functions as a leading indicator, turning one to three quarters ahead of the official series on multifamily starts.  After the latest downturn, for example, the zigzagging upward trend in the MPI began about three quarters before a similar pattern emerged in the starts series.

MPI 12 Q4

Although the MPI’s market-rate rental component dropped four points in the fourth quarter, it still remains well above the break-even point at 65.  Moreover, the market-rate rental component has now been above 60 for six consecutive quarters—the longest sustained period above 60 since NAHB launched its multifamily survey in 2003.

Meanwhile, the MPI’s condo component reached its highest point since the fourth quarter of 2005, increasing two points to 46, while the low-rent component increased seven points to 53.

The MPI is one of two major sentiment indices produced from NAHB’s quarterly multifamily survey.  The other is the  Multifamily Vacancy Index (MVI), which recently has shown ongoing strength in demand for existing apartments and is one of the reasons NAHB expects multifamily production to remain fairly strong.

However, builders and developers are starting to encounter constraints to their ability to keep up with increased demand—particularly emerging shortages and rising costs of building materials, labor and land.

A complete history of the MPI and each of its components is available on NAHB’s web page for the multifamily market survey.

Apartment Construction Continues to Improve

March 8, 2013

Completions of unfurnished apartments for rent or sale in 5+ unit properties climbed to more than 30,000 units during the third quarter of 2012, a 20% increase versus the third quarter of 2011. The Survey of Market Absorption of Apartments (SOMA) tracks completions and market absorption rates (units rented or sold after construction of the property is complete) for apartments sold or rented in 5+ unit properties. The three-month absorption rate of unfurnished apartments declined during the fourth quarter of 2012, slipping four percentage points to 64%. The absorption rate has averaged just above 60% during the last four quarters.


Absorption rates for condo and co-op units have improved compared to the numbers observed in the post-bubble aftermath. For those units completed during the third quarter and sold during the fourth quarter of 2012, the 3-month absorption rate dropped to 57% (from 66%), which is identical to the rate averaged over the past four quarters. Even though absorption rates have trended higher from their cyclical lows, the volume of condos and co-ops being built and sold remains incredibly weak. During the third quarter of 2012, a total of 1,700 condos and co-ops were completed—29% below year-ago levels. Moreover, completions are down 94% compared to the peak levels observed at the end of 2006. The forecast calls for condo/co-op construction to continue rising, but we expect their share of overall multifamily housing production to see only modest increases going forward.


The SOMA data also enable one to drill down further into other types of multifamily units completed in a particular quarter. Nearly 12,000 units tied to affordable housing programs such as the Low-Income Housing Tax Credit (LIHTC) were completed during the third quarter, a 9.2% improvement from the prior year. Overall, LIHTC and other affordable housing program apartments accounted for nearly a quarter of all completed units in the third quarter of 2012.


NAHB Survey on AD&C Lending for the 4th Quarter

March 4, 2013

Builders and developers continue to report that credit for acquisition, development, and construction (AD&C) is improving slightly, according to NAHB’s survey on AD&C financing.  In the fourth quarter of 2012, the overall net tightening index based on the AD&C survey was -4.5, which was little changed from the third quarter.  The index is constructed so negative numbers indicate easing of credit; positive tightening.

A similar net tightening index from the Federal Reserve’s survey of senior loan officers was -13.4 in the fourth quarter.  So for two consecutive quarters now, builders and lenders have agreed that availability of credit in the construction sector is improving.

AD&C Q4 2012

Of course, two quarters of modest easing is not enough to offset the many consecutive quarters of tightening that occurred between 2006 and 2011.  On balance, AD&C credit is probably still a drag on the housing recovery, as indicated by FDIC data on the stock of outstanding AD&C loans that, although no longer shrinking, is not growing to keep pace with the improvement in housing starts.

According to the NAHB survey, the greatest improvement occurred in the availability of credit for single-family construction.  Only 11% of NAHB members said availability of credit for single-family construction had gotten worse in the fourth quarter, compared to 29% who said it had gotten better.  For land acquisition, development, and multifamily construction, NAHB members were closer to evenly split on whether credit conditions had improved or gotten worse.

Among NAHB members who said AD&C credit conditions had in fact continued to deteriorate in the fourth quarter, the most common problems were lenders simply not making new AD&C loans (65%), reducing the amount they are willing to lend (62%), lowering the allowable LTV (or loan-to cost) ratio (62%), requiring personal guarantees or collateral not related to the project (60%), and refusing to make relationship loans (60%).

For more detail, see the full report on AD&C Financing for the 4th Quarter.

Multifamily Production Falls Back to November Rate

February 21, 2013

The Census Bureau’s preliminary estimate of starts in buildings with five or more apartments for January came in at 260,000 (at a seasonally adjusted  annual rate).  As predicted in last month’s post, a rate well in excess of 300,000 proved too high to sustain.  In fact, the five-plus starts rate for December was revised upward, from 330,000 to 352,000—so the preliminary estimate for January shows up as a 26 percent decline, dropping the five-plus starts rate back to where it was in November.  Month to month fluctuations on this order of magnitude are not unusual in the multifamily construction series, however.

5-Plus Jan

On a year-over-year basis, five-plus starts were still up 35 percent, reflecting the generally upward trend in multifamily production that has prevailed since the end of 2010.

Meanwhile, the rate at which new five-plus permits were issued remained relatively stable in January, increasing 1 percent to 311,000—the third straight month the five-plus permit rate has been slightly above 300,000.  The rate of new five-plus permits usually runs a little above the rate of new five-plus starts (partly because of the Census Bureau’s tendency to reclassify some units considered multifamily by local permitting offices as single-family attached).  Nevertheless, the five-plus permit numbers in recent construction reports have been strong enough to suggest that a five-plus starts rate at slightly above 260,000 is sustainable over the short run.

Multifamily Production Rate Hits 4.5-Year High

January 18, 2013

In December, the (seasonally adjusted) annual rate of starts in buildings with five or more apartments increased by 23 percent from the revised figure for November, to 330,000.  The November figure was revised down substantially, but the big news is that the rate of multifamily production continues to climb, even after the large improvements it made in September and October of 2012—to the point where, at 330,000, the five-plus starts rate is now up 115 percent year-over-year.  Historically, this also marks the first time the monthly five-plus rate has been over 300,000 since June of 2008, shortly before the housing downturn hit the multifamily industry.MF_starts

Meanwhile, the rate at which new five-plus permits were issued in November declined by 1 percent to 301,000, while the backlog of unused permits in the pipeline increased by roughly 6 percent, to 46,800 (not seasonally adjusted).  Overall, the December permit numbers were strong enough to indicate that the five-plus starts rate is likely to remain relatively healthy in the short run, although a rate as high as 330,000 may be a little too much to sustain.

Apartment Production Stable at 4-Year High

December 20, 2012

In November, the (seasonally adjusted) annual rate of starts in buildings with five or more apartments was 285,000, according to the latest  release from the Census Bureau’s Manufacturing and Construction Division.   In the release this shows up as a 4,000 increase from October, but the five-plus starts rate for October was revised downward by 4,000; so the preliminary rate for November is exactly the same as the rate initially reported for October a month ago.  Irrespective of any revision, the five-plus starts rate has been relatively stable and over 280,000 for two consecutive months now—the highest this measure of apartment production has been since July of 2008.MF Starts

Although not as high as annual production during what many consider the “golden age” for multifamily housing (roughly 1997 through 2006), a five-plus starts rate of 285,000 is high enough to rank as one of the weaker golden-age months.

Meanwhile, the rate at which new five-plus permits were issued in November increased by 10 percent—largely offsetting the previous month’s decline and taking the five-plus permit rate back up over 300,000.  The backlog of unused, previously issued five-plus permits in the pipeline was also relatively stable in November, at 44,000 (not seasonally adjusted).  On balance, the November permit numbers indicate that, subject to the normal monthly fluctuations, a five-plus starts rate in the neighborhood of 280,000 is likely to be sustainable over the short run.


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