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Market update: Not enough multifamily homes despite construction boom

Residential real estate investors in the United States are faced with a confusing situation. Although demand and construction for single-family and multifamily homes are quite high, the housing stock for both markets remain below long-term averages, according to this article by CoStar.com.

The high demand for apartments in central business districts across the country has driven a growth spurt in construction projects. It appears it’s not enough, however, with supply still low. Experts predict it’s not enough to accommodate the growing population of millennials who are now entering their 30s. This particular market of home buyers are looking to buy along with starting their own families.

“There is a lot of building going on, and while no one is saying that we need another luxury apartment building in many of America’s cities, we desperately need more housing,” said Mark Hickey, who works as a real estate consultant for CoStar Portfolio Strategy.

In addition to that specific group of millennial buyers are empty-nesters who are down-sizing to smaller and conveniently located apartments. They appear to be the main driving force behind the demand in the multifamily sector. The article notes that the new apartments built and all the construction projects are still nowhere to the real estate market levels back in the 1970s and 1980s.

“It turns out that the older baby boomers are emerging as the real ‘renters by choice,” said John Affleck, director of analytics at CoStar during the Midyear 2017 Multifamily Review and Forecast. “We’ve reached a point in the cycle where the rental rolls have added more 55-64 year olds than age 25 and up.”

Since 2011, construction for multifamily properties are steadily growing in level that has not been seen for at least three decades. However, what happened in 2007 has left a gaping hole in US real estate. Construction for single-family homes have since the recession and mortgage collapse declined, while new households keep forming. According to CoStar, it’s too much for the US housing market to handle, resulting in a large supply-demand imbalance.

“The downtown cranes may give the appearance of a housing supply glut, but in fact, US household formation has outpaced construction by more than 3 million housing units,” said Affleck.

Fortunately, the single-family housing market is recovering with increased levels in construction and home ownership rates. This helps put some of the pressure off multifamily properties. During the second quarter of the year, CoStar reports that 73,000 rental units were absorbed. It’s the strongest performance for this market since 2014  and is almost record-high. Meanwhile, the national apartment vacancy rate fell from 6 percent to 5.9 percent.

“Home ownership remains the goal of most American households and many more households would purchase home if they were more affordable and available,” Affleck said.

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