Builder and developer confidence in the multifamily market strengthened in the second quarter of 2019, according to the National Association of Home Builders’ (NAHB) Multifamily Market Survey (MMS). The MMS consists of two indices measuring supply and demand in the multifamily market: the Multifamily Production Index (MPI) and the Multifamily Vacancy Index (MVI).
In the second quarter, the MPI jumped 16 points to 56 compared to the first quarter of 2019 (Figure 1), while the MVI dropped eight points to 40, with lower MVI numbers indicating fewer multifamily vacancies (Figure 2).
The MPI measures builder and developer sentiment about current production conditions in the apartment and condo market on a scale of 0 to 100. The index and all of its components are scaled so that a number at or above 50 indicates that more respondents report conditions are improving than report conditions are getting worse.
The MPI consists of three components measuring key segments of the multifamily market: construction of low-rent units—apartments that are supported by low-income tax credits or other government subsidy programs; market-rate rental units—apartments that are built to be rented at the price the market will hold; and for-sale units—condominiums. All three components posted increases in the second quarter: the component measuring low-rent units increased nine points to 56, while the component measuring market rate rentals jumped 22 points to 64 and the component measuring for-sale units rose 19 points to 50.
The MVI measures the multifamily housing industry’s perception of vacancies in existing apartments. It is a weighted average of current occupancy indexes for class A, B, and C multifamily units, and can vary from 0 to 100, where a number under 50 indicates more property managers believe vacancies are decreasing than increasing. The MVI generally rose throughout 2018 and reached 48 in the first quarter of 2019, the highest level since 2010. It dropped sharply to 40 in the second quarter of 2019, the lowest reading since the second quarter of 2017 (Figure 2).
Historically, the MPI and MVI have served as leading indicators one to three months in advance for Census multifamily starts and rental vacancy rates, respectively. However, this quarter’s index readings are in line with current Census numbers, which show a strong gain in starts and lower vacancy rates.
The solid multifamily index readings are a reflection of a multifamily housing market supported by low unemployment and healthy household formation rates. It is important to note that the majority of new production in the multifamily market – 94 percent of 2+ unit construction in the second quarter – consists of rental units.