by Calculated Risk on 10/27/2011 03:07:00 PM

From the National Multi Housing Council (NMHC): Development Ramps Up as Demand Swells Finds NMHC Quarterly Survey

Increased demand for rental housing has led to a considerable uptick in multifamily construction, finds the National Multi Housing Council’s (NMHC) latest Quarterly Survey of Apartment Market Conditions.

The pace of development activity has increased in most markets. Two-thirds (67%) of respondents noted considerable activity, either in the planning stage or actual new construction. In particular, 20% said developers are breaking [ground] on new projects at a rapid clip. The other 47% reported an increase in pre-construction activities—acquiring land, lining up financing, getting building permits—but not much actual construction yet.

Even with this increased activity, more than half (54%) think new development remains considerably below demand.

"Powerful demographic trends along with changing attitudes about homeownership and tighter mortgage underwriting continue to drive a shift toward renting, which is fueling a ramp up in new construction," noted NMHC Chief Economist Mark Obrinsky. "While some survey respondents expressed concern over sporadic overbuilding, others noted that the lack of construction financing may prevent some developments from actually breaking ground."

Overall, the apartment market continued its healthy growth, although there is some evidence of a slowdown. For the sixth time in the last seven quarters, all four market indexes were above 50—a reading above 50 indicates improving market conditions—although all four fell, suggesting less widespread growth than the prior quarter.

"A narrowing in the extent of the improvement is not unexpected after almost two years of strong gains," said Obrinsky. "As long as the economy continues to generate jobs, the apartment upswing should remain on track."

Click on graph for larger image.

This graph shows the quarterly Apartment Tightness Index.

The index has indicated tighter market conditions for the last seven quarters and although down from the record 90 earlier this year, this still suggests falling vacancy rates and or rising rents.

This fits with the recent Reis data showing apartment vacancy rates fell in Q3 2011 to 5.6%, down from 6.0% in Q2 2011, and 9.0% at the end of 2009. Based on this index, I expect the declines in vacancy rates to slow.

New multi-family construction is one of the few bright spots for the U.S. economy and this survey indicates demand for apartments is still strong.

A final note: This index helped me call the bottom for effective rents (and the top for vacancy rate) early last year.