Entering the new year, builders, flooring dealers and contractors servicing the multifamily housing sector find themselves navigating stormy seas. That’s due in large measure to rising construction costs, labor shortages and recent softening in this bellwether sector.
“Interest rates slowed starts of new projects [in 2024] and will make 2025 challenging in multifamily new construction,” said Tracy Wyrick, Engineered Floors’ vice president of sales, builder and multifamily.
The slowdown in the multifamily market, which is approximately 95% for-rent, is reflected by the growth rate of housing starts. The November seasonally adjusted rate for buildings with five units or more was 326,000, a nearly 9% spike over the October rate but down 12.6% compared to the November 2023 figure, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Experts attribute the spike to mortgage rates, which fell in advance of the Federal Reserve’s decision to cut interest rates this past September.
But these numbers don’t tell the whole story. “Breaking apart the multifamily data, two-family starts—which Dodge includes as part of the broader multifamily market—were up 43% while apartment starts were down 16%,” noted Sarah Martin, associate director of forecasting at Dodge Construction Network.
Confidence in new multifamily housing showed mixed results year-over-year in the 2024 third quarter, according to results from NAHB’s Multifamily Market Survey (MMS) released in November—the latest month for which figures are available. MMS measures builder and developer sentiment about current production conditions in the apartment and condo market. “Demand for rental apartments remains strong enough to support relatively high occupancy rates in existing projects,” said Tom Tomaszewski, president of The Annex Group and chairman of NAHB’s Multifamily Council. “However, construction costs, the cost and access to financing and the availability of land and regulations remain significant obstacles to new multifamily development.”
In contrast to single-family housing, apartment construction remained weak and likely faces a difficult year ahead. Despite strong demand, elevated apartment completions and higher construction costs have discouraged many multifamily developers. “Therefore, multifamily housing starts are expected to see a sharp decline [when totals for 2024 are in] and remain soft in early 2025 due to tight financing conditions,” Robert Dietz, NAHB’s chief economist and SVP for economics and housing policy, stated. “However, the multifamily market is projected to return to long-term trends by the end of 2025.”
Dodge planning data estimates it takes roughly 15 to 17 months for multifamily projects to move to start, suggesting a cyclical trough in multifamily construction in early 2025. Coming off an estimated 10% decline in units for 2024, Dodge expects to see a return to growth as the market recovers in 2025.
New privately owned housing (five units or more) authorized but not started in November was essentially flat when compared on a seasonally adjusted basis to the prior month and November 2023, the Census Bureau reported. “The sheer volume of multi- family units coming online in a short period will mean that the strength of 2023 and 2024 will not be sustainable in 2025 and potentially even into 2026,” said Steve Kuhel, director, Multifamily Solutions, FEI Group, the sector’s largest player. “Developers will still go forward with the projects that are planned—especially with anticipated rate cuts—but they will take their time to break ground.”
Demographic market impacts
Last year saw a confluence of factors that negatively impacted the multifamily business, some of which may carry over to the new year. “Rising land development cost, material cost, labor cost and mortgage rates are all critical components to ensuring the affordability of new homes and properties,” said Dan Butterfield, Dal-Tile’s vice president of sales, builder & multifamily. “Builders are being proactive to do what they can to mitigate these issues. Affordability is essential to this channel’s health.”
More residential construction is occurring in low-density suburbs and outlying areas because of several factors affecting housing affordability, including continued lack of buildable lots, higher home building costs and ongoing shortage of construction workers, according to NAHB’s Home Building Geography Index (HBGI), released in early December. NAHB chairman Carl Harris, a custom home builder from Wichita, Kan., noted multifamily construction across much of the nation in the third quarter remained lower than last year. “The exception was in lower density areas as housing affordability issues remain a key concern and populations have increased outside of urban centers,” Harris stated.
Continued migration into more sparsely populated areas is more likely to increase demand for lower-unit and lower-rise multifamily dwellings, according to Dodge’s Martin. “Planning reports for multifamily projects hit a trough in November 2023 and have been slowly but steadily improving.”
Multifamily vacancy rates fell 5.3% in Q3 as demand outpaced new deliveries, reported CBRE, a commercial real estate services and investment company. While rents have remained high due to tight home inventories and high mortgage rates, there are signs rent growth is beginning to moderate. This number held steady year-over-year at 0.3% in the third quarter, although the average annual rent is expected to begin accelerating alongside higher occupancy.
Vacancy rates stand to be impacted by more Millennials and Gen-Zers moving from their nests, boosting demand for rental properties and making the multifamily market a prime target for developers and investors. Other indicators will help determine whether market conditions are improving. “For multifamily, rent trends, occupancy rates and interest rates will affect the number of renovations in existing apartments,” noted Matt Walker, vice president of multifamily, Shaw Industries.
Shift in product choices
The multifamily sector is a mixed bag, which includes everything from apartments and condos to senior living spaces, student housing and factory-built homes. Naturally, demand for new flooring varies by segment.
Flooring industry members are keeping a watchful eye on ever-changing functional and design needs that stand to impact soft and hard surface sales to new homebuyers. For example, NAHB’s “What Buyers Really Want” report revealed hardwood remains homebuyers’ top flooring choice for main living areas. “In terms of interior finishes like flooring, increased demand toward luxury and high-end apartment buildings, as well as luxury homes, will benefit demand for those higher-end building products,” Dodge’s Martin added.
FEI Group’s Kuhel said he has seen a “tremendous two years of multifamily new construction for our members and the market, with significant new inventory delivering across the country. The new inventory that is coming online was weighted much more toward premium and high-end units, which predominantly uses hard-surface materials. What will be interesting is how much development goes forward in the mid to affordable housing markets, which tend to use more soft surface materials.”
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