Posted by Jeffrey J. Roach, PhD, Chief Economist
Wednesday, January 4, 2023
Multifamily Construction Rising, Bucking Trend of Single Family
It’s no surprise that residential activity is slowing. The housing market is coming off a euphoric run during the post-pandemic period of historically low interest rates. But, the slowing housing activity does not look as bad when compared with 2019. Still, housing starts were over 6% above the November 2019 levels, illustrating this unique cool-down period amid a nationwide housing shortage. Rising borrowing costs and hesitant home builders could make the nationwide housing shortage worsen in the near term as activity likely cools further.
Higher mortgage rates and uncertain economic prospects impacted the housing market and will continue to depress housing in the months ahead. As home sales stalled in recent months, housing starts and permits have also stalled. But that’s just at the aggregate level. Can we uncover any other trends in the details? Yes. Housing activity for multifamily dwellings improved in November and has been growing for the past few years as builders respond to the acute shortage in this sector. Single-family construction spending has consistently shrunk for the last several months. (See chart below.)
Rising Multifamily Construction Will Likely Suppress Rents
Building activity for 5+ units maintains its uptrend and an increase in supply of units should put a damper on future rent prices. November construction spending rose 0.2% from a month ago, supported by strong multifamily building projects. Multifamily construction spending is up over 8% from three months ago, as building activity for 5+ units remains strong.
Construction spending on manufacturing plants has also grown considerably over the last year. Firms are building manufacturing plants as reshoring is attractive, despite rising labor costs. This building activity, which helped contribute to solid performance for the industrials sector in recent months, should support job creation in the construction space amid a broader slowdown.
It’s the tale of two residential construction economies. Construction activity for single family homes is shrinking but apartment and condo construction spending is on the rise. The diverging trends will likely attract investors’ attention. Construction firms with a diversified portfolio should be able to weather any upcoming economic storm better than firms focused on single family home building. The recent trends will also affect inflation this year. Roughly one million apartments were under construction in November, roughly four times the amount from ten years ago. Increased supply in multifamily construction should ease future rent prices as vacancy rates rise.
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