Construction Starts Lag and Why This is News

by John Wilhoit Jr. on

If you have only been in the multifamily housing business from 2005 to 2010 you’ve lived through three cycles;   credit elasticity that exceeded the realm of sustainability, a period with vacancy practically doubling in short order, and  recovery (assumed recovery).   Granted, like with politics, all property is local and competes on a local basis.  But, of course, there are national trends that act as guides to future activity at the local level. 

As a multifamily property owner here are a few things you cannot control;   weather, economic meltdowns,  historic unemployment and credit availability.   Layer a few of these in a single  market and surviving selling ice to the Eskimo’s seems like an easier task.  However (weren’t you just hoping for a however?)  as an intelligent investor in multifamily, there are a few things you can control; one of them is where you acquire assets.   And where you acquire assets can sometimes be determined by your view of past, current and future multifamily housing construction starts.  

It’s one thing to identify current housing needs in a specific market, quite another to determine future needs (meaning competition).  Both are necessary to aggregate an opinion on identifying acquisition candidates and hold times. 

In late August 2005 Hurricane Katrina hits News Orleans.   This  is a historic event.  There is loss of life and property.  And migration.  For a short season the population of Baton Rouge roughly doubled from 225,000 to over 500,000 people.   Today, the city is approximately 275,000 people.   Anyone who built an apartment development in Baton Rouge in 2004 (that was still standing after the hurricane) looked like a genius.  What does this have to do with construction starts?  To wit:

Posted April 12, 2010 from www.builderonline.com:    Steady Growth in Residential Construction, Upkeep Spending Forecast Thru ’14   ” …..spending on multifamily buildings will drop 12% this year and 8% in 2011 before turning around in 2012 and rising 28% that year, 8% in 2013 and 9% in 2014.  In constant dollar terms, the annual expenditures will go from $31.34 billion in 2010 to $43.31 billion in 2014.  “Multifamily construction has been impacted severely by tight credit and will not recover until credit loosens,”. 

Some trends are just plain obvious and looking at projected population growth in an area AND housing starts (and multifamily starts) will provide an investor with ground level intelligence as to future occupancy and rent growth potential.  Job growth, the type of jobs being created and the clustering of employment centers within proximity to multifamily all impact vacancy and rent growth. 

Market specific multifamily housing starts, and their impact on rent growth is directly correlated to changes in population growthincome growth and job creation.   

Making a determination about population growth and aligning this information with the number of housing and multifamily housing starts will provide guidance on future vacancy and rent growth.   These two factors have significant impact on multifamily property value.   This is why its important to keep an eye on multifamily housing starts.  

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Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel.  For more information, visit: http://www.MultifamilyInsight.com

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