Economists' Outlook

Housing stats and analysis from NAR's research experts.

The Trend is Clear: Multifamily Construction on the Rise

Housing starts dropped in September below the historical average of 1.5 million homes as both single-family home construction and multifamily apartment building slowed down. Nevertheless, the number of housing units under construction rose to 1.7 million units for the first time ever. While construction delays and supply constraints have lengthened the under-construction time, the record high number of units under construction is also attributable to the rise of the apartment buildings. Data shows that there are more multifamily than single-family units under construction. Specifically, in September, 893,000 units in buildings with five units or more compared to 800,000 single-family units were under construction. Meanwhile, it’s worth noting that the number of single-family units under construction has decreased for the last four straight months. On the other hand, the number of multifamily units under construction has increased for nearly the last couple of years. Thus, the completion of these units could help with rent increases.

In addition, even more apartment buildings have begun construction. Although multifamily housing starts eased in September, the U.S. is building about 50% more than the pre-pandemic historical average. Nevertheless, our country continues to underbuild single-family homes. Yet the number of single-family housing starts is 13% below the pre-pandemic historical average. Thus, multifamily construction has made impressive gains during the last couple of years. While people are buying homes faster than they can be built, builders are turning to structures that can accommodate more people under one roof.

In the meantime, high construction costs are reported to be one of the biggest hurdles for builders. However, building multifamily homes may help offset some of these costs. In microeconomics, this is primarily due to economies of scale. For instance, most subcontractors may offer a discount when they do one big project instead of two small ones. Moreover, the cost of the lot may also be relatively smaller. Buying a larger lot to build a multifamily home may be less expensive than buying two lots. Additionally, by building ten units on a one-quarter of an acre lot as opposed to one unit, you could economize on the land cost.

Data shows that multifamily construction is on the rise at the local level, especially in larger metro areas where single-family home construction is slowing. For instance, in Atlanta, GA metro area, the number of permits issued for five or more units has tripled during January and August of 2022 compared to the same period a year ago. In contrast, single-family permits dropped by 15 percentage points. Respectively, permits issued for multifamily units in the Baltimore, MD metro area have also tripled, while single-family permits decreased by 40% during January and August 2022 compared to a year ago.

Hover over the map below to see how many multifamily versus single-family permits were issued during January and August 2022 and the same period in 2021

However, the supply of multifamily units is still not keeping up with demand, so rent prices will continue to rise quickly. For example, the rental vacancy rate in the Baltimore metro area was 3.1% in Q2 2022. The vacancy rate in the Richmond, VA, metro area was below 2%. While the rental vacancy rate is still low in some of these areas, rent prices will keep climbing as many people have already been forced out of the market due to low affordability. Mortgage rates are near 7%, increasing the home borrowing cost significantly. The monthly mortgage payment is about $1,000 higher than a year ago. So, current buyers need to earn $40,000 more to afford to buy the median-priced home compared to a year earlier. As a result, about 15% fewer renters can afford to purchase the median-priced home compared to a year ago. But, this could make people rent for longer, boosting the demand for rental homes.

Finally, although multifamily units are the new trend, single-family homes remain the most common home type for recent buyers at 82%, followed by townhomes or row houses at 7%. In 1981, 76% of homes were single-family, according to the 2021 NAR Home Buyers and Sellers Survey.