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Record Number of Multi-Family Housing Units Under Construction

Plus, Low-end single-family rentals are getting more expensive and 6 more handpicked RE insights

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Estimated read time: 3 minutes 34 seconds.

Macro Trends

Perspective on Current Capital Markets Themes link 

  • The Federal Reserve is intently observing the relationship between inflation and the labor market, with a potential policy shift not expected until late Q1 or early Q2 of 2024.

  • The economy might face a recession as it adjusts to a prolonged period of higher interest rates, with a new growth cycle anticipated around 2025.

  • Super-Core Inflation, which offers a more detailed view of economic costs excluding Housing Services, has seen a rise, highlighting the resilience and tightness of the labor markets in sectors like Airfare, Professional and Medical Services, and Transportation Services.

Real Estate Trends

Rents Continue to Dip, While Home Prices Rebound to All-Time Highs link

  • The U.S. rental market experienced rapid price increases in 2021 and 2022, with year-over-year rent growth peaking near 20%. However, home prices were escalating even faster, making the cost of owning versus renting more significant than ever.

  • By 2023, the gap between home prices and rents expanded. Home prices quickly recovered from a brief decline, while rents decreased year-over-year and continued to soften.

  • During the pandemic's first year, home prices skyrocketed while rents remained mostly unchanged. By the end of the first year, rents returned to pre-pandemic levels, but home prices surged by 13.5%. In the subsequent year, rent prices were 16.3% higher than in March 2020, and home prices increased by 33.5%.

US housing starts fall to lowest level since 2020 in worrying sign for the economy link

  • August US housing starts plummeted to its lowest in three years, indicating potential economic concerns. This decline in homebuilding is attributed to mortgage rates persistently hovering above 7%.

  • US housing starts, marking the onset of new home construction, dropped by 11% in August to 1.23 million, the lowest since June 2020. This was below the anticipated 1.44 million units by economists.

  • Despite the downturn in housing starts, housing permits saw a 7% surge to 1.54 million in August, hinting at a potential rebound in single-family construction in the upcoming months.

Near Record Number of Multi-Family Housing Units Under Construction link

  • Total housing starts in August 2023 saw a decline of 14.8% compared to August 2022, with a year-to-date decrease of 12.5% from the previous year.

  • Over the past 16 months, housing starts have been lower year-over-year for 14 months, with only May and July 2023 being exceptions.

  • Despite the decline, the expectation is that total starts will continue to decrease this year, but the year-over-year comparisons are anticipated to be less stark for the remainder of the year.

Low-end single-family rentals are getting more expensive link

  • U.S. single-family rent increases in July 2023 were at a 3.1% year-over-year gain, down from 3.3% in June. The Single-Family Rent Index (SFRI) showed a drop for the 15th consecutive month, influenced by factors like a surge in apartment construction.

  • Metro areas mostly saw single-digit annual rent growth, but Las Vegas, Miami, and Austin, Texas recorded declines. St. Louis had the highest year-over-year increase at 7.3%, with Chicago following at 6.3%.

  • CoreLogic's analysis of rental price tiers revealed that the lower-priced category saw a growth of 4.66%. In contrast, detached rental prices increased by 2.4%, while attached rental prices saw gains of 3.8%.

Class A Rent Performance Weighing Down Some Apartment Markets link

  • Across the U.S., apartment rent growth nearly stopped in August, with an overall annual effective asking rent change of just 0.3%. Class A rents, however, showed a 0.7% increase, while Class B remained stagnant and Class C showed a 0.4% decline.

  • In several major apartment markets, Class A rent changes, often indicative of new supply, are dragging down overall market figures. In some areas, Class A rent changes are over 700 basis points below Class B and C figures and more than 300 basis points below market averages.

  • Cincinnati stands out with Class A rents growing only 0.5% annually in August, while Class B and C units saw growth above 5%. Cincinnati ranks second among the top 50 U.S. markets for rent growth, just behind Newark.

Something I Found Interesting

There Are 73 Million More Working-Age Residents Today Than in the 70s link

  • Over 1 million market-rate apartment units are currently under construction, marking a construction high not seen in four decades. However, concerns of overbuilding similar to the 1970s may be misplaced.

  • In the 1970s, peak completion volumes represented 6.5% of all existing inventory, whereas today it's only 3.4%. This is nearly half of the 1970s boom, indicating a different market dynamic.

  • The U.S. working age population in 1977 was 135 million, but today it stands at 209 million. This suggests that while there might be local oversupply issues, the overall demand will likely balance out, preventing a nationwide oversupply of multifamily housing units.

Location Specific

Emerging Industrial Markets: Detroit (I trust them) link

  • Detroit, historically known for its leadership in the automotive industry, is now advancing in new technologies related to mobility and manufacturing. The city has attracted West Coast tech companies due to its business-friendly environment, quality of life, and affordability, leading to significant investments in state-of-the-art facilities.

  • The Detroit region boasts a population of approximately 4.9 million within 50 miles, with a warehouse labor force of 67,322 expected to grow by 6.7% by 2033. The city's unemployment rate stands at 3.9% as of July 2023, closely aligning with the U.S. average of 3.8%.

  • Over the past five years, Detroit has secured 400 economic incentive deals valued at over $2 billion, averaging $30,000 per new job. The Michigan Business Development Program (MBDP) is among the top incentive programs, offering performance-based cash grants for businesses that create new jobs and invest in capital.

That's all folks. If you enjoyed today's issue, please reply (it helps with deliverability)

Cheers,

Vidit

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