Apartment builders didn’t get the housing crisis memo



The housing market is in dire straits, with 30-year mortgage rates averaging above 7%, housing starts and prices falling, and insiders predicting worse times ahead. So why were more than 1.7 million homes under construction in the United States in September, a new all-time high?

Part of the answer is that the housing market is in dire straits and builders are slowing the pace of construction because there is no point in rushing. But as the chart above shows, it’s the construction of apartments, not single-family homes, that’s breaking records and, well, apartments are different.

One of the differences between apartments is that they have always taken longer to build than single-family homes, and the gap has widened a lot lately.

The sharp increase in multifamily completion time over the past two decades is not so much because builders have gotten slower, but because buildings have gotten much taller – and taller buildings generally take longer time to build. Every year since 2017, most multifamily units completed in the United States are in buildings of 50 or more units, which has never happened before (and yes, these statistics only go back to 1972, but I am reasonably convinced that this is a historic first).

Larger buildings and longer construction times are a big reason why apartments have made up the majority of housing under construction in recent years, something that hadn’t happened on a sustained basis since the early 1970s. but they do not explain everything. Housing permit statistics, which are unaffected by construction time, show (1) more multi-family housing authorized than at any time since the mid-1980s and (2) barely any decline in multi-family permits in recent months, a great contrast with what is happening in single-family construction.

Multi-family investors rely on a different set of financing tools than individuals buying single-family homes, so they don’t appear to have been as impacted by interest rate increases — yet. The capitalization rate for multi-family first-class A assets, a measure which represents in some way the interest rate on new multi-family investments, was still below pre-pandemic levels at 4.09% in the third quarter, according to CBRE Research.

Yet, interestingly, developers are continuing to build so many large apartment buildings despite a pandemic and a boom in remote working that many believe will drive people away from apartment living. CBRE Research also reports that multifamily investors are now more optimistic about future rent increases in so-called gateway markets — the largest and most expensive metropolitan areas — than in smaller ones. Maybe these investors know something about the future that the rest of us miss. The boom of the 1970s appears to have been driven by millions of baby boomers entering adulthood, along with billions of dollars in federal government housing subsidies and the rise of the then-exotic form of ownership called the condominium. It ended abruptly when the 1973 oil crisis sent inflation, interest rates and unemployment skyrocketing. The boom of the 1980s was clearly fueled in part by tax incentives, given that they faded when they were removed by the 1986 tax reform.

Something will also eventually stop the current multi-family boom. But the crash hasn’t happened yet.

More from Bloomberg Opinion:

• Downtown San Francisco can’t shake off work from home: Justin Fox

• Downsizing? Rising interest rates are your friend: Conor Sen

• Buying a house now wouldn’t be a bad idea: Teresa Ghilarducci

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering business. Former editorial director of Harvard Business Review, he has written for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market”.

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