TD Economics: Five-Year Multi-Family Construction Outlook ...

By Gail Kalinoski, Contributing Editor

Image courtesy Flickr user compujeramey

A new report focusing on multi-family housing trends along the East Coast predicts most markets will experience significant increases in multi-family housing construction over the next five years with the greatest opportunities for growth occurring in the South Atlantic region.

The report by TD Economics, an affiliate of TD Bank, notes that the demographics, declining homeownership and past underinvestment will fuel a stronger recovery in the South Atlantic states such as Florida and Georgia. It expects multi-family housing starts to grow at an annualized pace of 20 percent in the South Atlantic and 10 percent in the Northeast over the next five years.

Developers are already responding to a burgeoning demand for more multi-family housing, sending starts soaring 59 percent in the last two years across the United States, according to TD Economics report. That number is in stark contrast to the single-family starts, which declined 2 percent between 2009 and 2011, the report stated.

Other commercial real estate firms are also forecasting increased multi-family development to meet the pent-up demand for rentals exacerbated by high unemployment and large number of single-family foreclosures. Marcus & Millichap Real Estate Investment Services Inc. noted in its 2012 National Apartment Report that only 39,000 multi-family units were completed last year, the lowest number recorded for at least three decades. That report notes permits for construction of five or more units increased by 45 percent to 232,000 units year-to-year as of October 2011. Marcus & Millichap estimates starts will accelerate by the middle of the year and take about 12 to 18 months to complete.

?What?s been built over the last few years since 2007-2008 is running at a fraction of what the historic number (of starts) had been ? and the population is still growing,? Greg Gerken, head of U.S. commercial real estate for TD Bank, told Commercial Property Executive.

Gerken said population growth and household formations are two important drivers in multi-family housing development. The projected increase in population from 2011 to 2017 favors the South Atlantic states for multi-family investment. The TD Economics report notes that the deeper recession in the South Atlantic meant more people out of work causing the ratio of households to population to fall more than in the Northeast. At the same time, fewer people were leaving the Northeast for the southern states. But that is expected to turn around. The TD Economics report predicts the job market will improve in the South Atlantic and the population is also projected to grow along with it.

The report also looks at growth in household formations because new households tend to seek out multi-family housing. Georgia?s is expected to increase almost 9 percent between 2011 and 2017, slightly outpacing Florida and North Carolina, which are each predicted to have about 8 percent household growths during that period. By comparison, New York, New Jersey and Pennsylvania are all projected to have household growth of less than 2 percent each.

Prior to the recession, there was more multi-family housing built in the Northeast than the South Atlantic. During the recession, there was a decline in multi-family investment, further increasing the lack of supply. While the region, particularly Florida, was hit hard by the recession and foreclosures, much of its housing built between 2000 and 2006 was single-family. Some of those foreclosed properties have been turned into rentals, but the TD Economics report says that only offsets some of the South?s need for new multi-family investment. Much of that single-family housing stock was built far from metro areas and transit and would not be a good substitute for many seeking multi-family housing near city centers.

In fact, all along the East Coast there is a need for multi-family housing near transportation hubs, Gerken said. He cited New York City and the metro Washington, D.C., areas in particular.

?There?s heavy demand for new buildings on transportation lines. That?s a big driver of growth,? he said.

Gerken said as the Washington, D.C., Metro system expands further into the suburbs of Virginia, communities are looking at multi-family housing near train stations.

?They just rezoned all those key transportation hubs as they build that Metro line out. They are allowing for increased density,? Gerken said.

Alistair Bentley, who wrote the TD Economics report, cautions that because it takes time to develop multi-family housing there is a danger that some markets may someday be oversaturated, particularly in the slower growing Northeast. But neither Bentley nor Gerken expect overbuilding to be a problem any time soon because of the lack of supply and the growing demand.

?Smart development is the key,? said Gerken.

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