The news, contained in annual data on new housing characteristics that the Census Bureau released with little fanfare earlier this month, may come as a surprise amid a pandemic that has emptied downtown office buildings and caused real estate bidding wars in outer suburbs and hill stations. . Large apartment buildings don’t really seem to fit the moment.
One explanation for their continued boom is that, to be completed in 2021, large apartment buildings generally had to have been under construction before the pandemic hit. According to the Census Bureau’s construction survey, the average time from permitting to completion for multi-family buildings with 20 or more units completed in 2021 was about 19 months.
But that doesn’t explain what’s next: After plummeting in 2020, the number of new units allowed in multi-family buildings has taken off, rising 37% in the last 12 months compared to the same period in 2018/2019.
Apartment completions are now down a bit, reflecting this slowdown in 2020 permits, but that should pick up soon. We don’t know for sure how many of these new apartments will be in tall buildings, as permit statistics don’t differentiate between 5 and 50 unit buildings. But over the past five years, units in buildings with 50 or more units accounted for 57% of all multi-family housing completions, while those in buildings with 20 or more units accounted for 85%.
During the apartment building booms of the 1970s and 1980s, small apartment buildings predominated. Today, multi-family buildings of four units or less are barely built — the Census Bureau estimates that only 4,000 duplex units and 3,000 units in buildings of three or four units were completed in 2021 — and those of five to- The 19-unit range has gone from being a mainstay of the new-build apartment offering in the US to an afterthought.
The disappearance of this “missing link” between single-family homes and larger multi-family structures has been much lamented, and, as the graph above clearly shows, the boom in large apartment buildings has not been enough to completely offset it. Yet apartment building is now at levels not seen since the 1986 Tax Reform Act removed major tax incentives for investment in rental housing. By contrast, overall housing construction — which consists mostly of single-family homes — is still only around two-thirds of its 2006 peak.
A longer, population-adjusted view shows that the period from 2008 to 2015 was the weakest for US housing starts since World War II, and one of the weakest on record.
This collapse in housing construction occurred just as members of America’s largest generation, Millennials, were entering adulthood. Not the right time! The current boom in large apartment buildings is therefore occurring against the backdrop of a growing supply of housing, but not fast enough to meet the demand that has accumulated during this crisis. And now it has taken new forms with the adoption of remote working in the age of the pandemic.
The ability to detach from downtown offices and even major metropolitan areas has, to some extent, diverted demand from expensive urban neighborhoods and coastal metropolises in general. But quaint mountain towns can only accommodate a limited number of newcomers, and physical and political barriers to building many more single-family homes are popping up in major inland metropolitan areas as well as coastal areas. It’s no surprise that multi-family housing makes up the majority of new housing built in New York, Philadelphia, Seattle, Miami, and Boston, but it’s a bit surprising that the same is true for Metro Austin. , Denver and Twin Cities. regions, with Nashville not far away.
Other smaller metropolitan areas where the majority of new housing permitted in 2021 was in buildings with five or more units included Napa, California (86.3%), Missoula, Montana (73.2%), Santa Fe, New Mexico (72.9%); Madison, Wis. (72.8%); Boulder, Colorado (62.4%); and Rapid City, South Dakota (53.6%). This is clearly not just a big city affair. And while apartment buildings with more than 50 units likely make up a smaller part of the mix in these locations than in major metropolitan areas, the trend toward largeness has been pretty universal. Another way to measure it is the height of buildings.
Most of these buildings probably do not exceed four stories. According to New Housing Characteristics data, 77% of multi-family dwellings completed in 2021 were in wood-frame buildings. While “mass timber” buildings of up to 18 stories are now permitted, “stick” framing similar to that used in single-family homes is the norm in wood-frame apartment construction in the United States and is subject to stricter height limits. The resulting proliferation of square, “five-by-one” apartment buildings with five wood-frame floors on a concrete first floor (or, if you prefer, Type V rather than Type I construction) is something which I have written about at length in the past and I won’t go into it here except to urge you to call them “stumpies” because I think that’s a good name.
But why the transition from small buildings to large ones? I don’t think consumer demand really explains it. Yes, a large building or complex can offer amenities such as pools, gyms, and concierges – not to mention views, if it’s large enough – that a smaller one cannot, and there seems to have been an increase in the number of wealthy renters, many of whom are empty nests, who demand such amenities. Supply-side factors, however, seem more important.
Housing construction is more difficult than before, partly because there is not much developable land left in major metropolitan areas (or even near them in some coastal metropolises) and partly because obstacles development policies and regulations have increased. This favors developers with lots of resources and expertise. As industries evolve, multifamily housing development isn’t all that concentrated — the top 25 U.S. developers, ranked by the National Multifamily Housing Council, accounted for a quarter of multifamily housing starts in 2021. But even developers well below the top 25 are going about their work in an increasingly professionalized and institutionalized way, with unions, real estate investment companies and even sovereign wealth funds all playing a part. Building duplexes on vacant land in a residential neighborhood isn’t really worth these people’s time. Building a 150-unit apartment building in a city or suburban shopping district often is.
Will it continue? The annualized return on investment in apartments in the United States has been 9.2% over the past decade, according to the National Council of Real Estate Investment Fiduciaries, with a return for the four quarters ending March of 24, 1%. Rising interest rates and a slowing economy mean 2022 and 2023 won’t be as lucrative – the Standard & Poor’s 500 Residential REITs Sub Industry Index is down 36% since April – and a slowdown in the construction will almost certainly follow. But the longer-term forces driving investment in large apartment buildings don’t seem to be fading.
More other writers at Bloomberg Opinion:
Cooling housing market will lead to more dysfunctions: Conor Sen
Housing defies Fed campaign to curb inflation: Jonathan Levin
Real estate bubble fears and your down payment: Alexis Leondis
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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