Multifamily Construction Starts and Household Formation

by John Wilhoit Jr. on

Is the great recession over? Are we there yet?  These questions will remain unanswered, but I can tell you with a high degree of certainty that as household formation picks up steam multifamily construction is well below future demand. 

Here is a definition of household formation from a report issued by www.housingamerica.org  entitled “What Happens to Household Formation in a Recession?” by Gary Painter of USC. 

 ”New households can be formed either when children move out of their parents’ homes, when couples separate or when unrelated individuals choose to live singly after previously sharing a residence”

Household formation drives demand in multifamily construction.  As we see household formation accumulate to measurable numbers we will also see increasing construction starts.  And this time, with a much sharper pencil and focus on urban markets.   There will be limited tertiary construction with a hope and prayer that “they will come”.  

As job creation returns more adults will choose to leave living arrangements with family members caused by recessionary pressures.  This increase in household formation will place added pressure on multifamily demand. As the rate of household formation increases, concurrent with years of low multifamily construction starts, vacancy will decrease and rent growth will escalate.

An on-going misnomer is that “shadow inventory” is dampening demand for apartment rentals- not true.  Of the potential ten million single-family homes representing this supposed shadow inventory- six million are in various stages of foreclosure. Translation; un-available for rental.

These foreclosures will eventually clear.  Regardless, housing construction starts (single-family and multifamily) remain well below future demand occuring from:

  • Continued increases in population (normal new household formation)
  • The reversal of families doubling-up (delayed new household formation)
  • In-migration into the United States
  • Decreases in average family size

U.S. Census Bureau staff released a paper in early 2011 entitled “The Effects of Recession on Household Composition: “Doubling Up” and Economic Well-Being by Laryssa Mykyta and Suzanne Macartney, U.S. Census Bureau.  They reference Mr. Painters definition and add Census statistics. From the article:

“One way people may cope with challenging economic circumstances is to combine households and household resources with other families or individuals” 

The abstract states, in part, that those most likely to double-up were adults not in the workforce.  Conclusion: as availability of jobs increases doubling-up reverses.

Population keeps popping, albeit at a drip pace, but still increasing.  And with recent job creation ticking  up  ”Junior” and his bride-to-be are finding opportunities to move from the nest and form their own household.  Mom is happy.  Junior is happy.

We will see more infill construction, close in suburbs, new single-family and multifamily housing attached at the fencepost to rail, light rail and rapid transit systems.  As Professor Shiller is apt to say “x-urbs” may well be behind us. 

Jobs are key and jobs are first created in urban areas where synergies exists.  Waiters and welders both work in cities- in urban environments, and expand from these dense places to suburbs, x-urbs and beyond.  Our densely populated cities will become denser with people tepidly leaving the “safety in numbers” for suburban environs.  

If you wonder about how the gainfully employed feel about leaving a finally found job, ask anyone unemployed for twelve or more consecutive months.  I submit that their commute is shorter than ever before as they identify housing within a stone’s throw of their job. Yes, increases in household formation will create demand  for multifamily- but close to job centers first and foremost.    

John Wilhoit, Jr. Releases Multifamily Insight Book on Amazon

Multifamily Insight Volume 1 delivers hard hitting facts about how to buy and operate multifamily apartment assets. Multifamily Insight Volume 1 teaches its readers how to apply techniques to increase revenue and control expenses in today’s volatile market. It is a reference guide delivering educational content about how to implement real world strategies in professional property management and execute multifamily operations at their highest level of efficiency

About This Blog
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

 

If you enjoyed this article, get email updates (they're free)!

Leave a Comment

Previous post:

Next post: