California’s road to recovery from the Great Recession has been marked by significant changes in the real estate sector. One of these is robust construction activities for multi-family residences (MFRs), which have consistently outpaced new construction for single-family residences (SFRs).
MFR starts in California have been on an upward trend since 2010. In 2016 however; the number of new starts decreased 7% from 2015, the first time a decline was recorded in five years. On the other hand, SFR starts in 2016 went up 12%.
In actual numbers, MFR starts still outpaced SFRs, registering 51,200 new constructions for the year compared to 49,400 for SFRs. However; the forecast for the next few years has SFR starts overtaking and surpassing MFRs until 2020, when MFR activities are expected to peak anew.
Factors that determine construction starts
The main driver behind developers’ decision to build single-family or multi-family residences is homebuyer-occupant demand. While speculators have significantly affected real estate sales in the years following the recession, their influence has been decreasing since 2015. Developers have earmarked specific projects for speculators such as staged subdivision developments and slow selling properties.
Buyer-occupant activity has been sluggish after the recession and generally continues to be so. But builders expect this to pick up as the economy continues to recover.
Reduced home buying activity in the meantime has translated into higher demand for rental properties. This partly explains the significant increase in MFR construction over the last few years.
Increase in demand for rentals
The rise in demand for rental properties has been largely attributed to millennials or adults 34 years old and under, who make up the largest demographic in the United States today.
Millennials are known to prefer renting to buying; a choice driven by a number of factors, including financial constraints, lack of affordable home buying options, a mobile lifestyle and delayed marriage. Millennials have also demonstrated a preference for apartments and rental properties that offer easy access to work and recreation options; a factor that has been significantly influencing MFR developments across the country.
Along with the millennials, a large portion of baby boomers are also making the move from oversized single-family homes to more compact apartments as they retire and their children leave the nest. This has also contributed to the increase in demand for MFRs.
Several factors indicate that the trend favoring rentals and MFRs may soon reverse as seen from the 2016 and early 2017 statistics on construction starts. These factors include:
- Improving economy – Unemployment rate in California has been steadily falling from its peak of nearly 12.5% in 2010. The unemployment rate for April, 2017 was 4.8%. However; the state population has also been growing which has led experts to conclude that employment rate comparable to pre-recession levels may only be achieved by 2019.
- Millennial trends – More and more millennials are nearing the new average marriage age of 30, giving them added motivation to buy a house. Likewise, their home-buying ability will likely improve as their salaries increase from their entry level rates.
On the other hand; renting will likely continue to be the trend in highly urbanized areas like Los Angeles, given the skyrocketing home values and limited housing inventory in the city.