Construction of new multifamily properties in the U.S. rebounded at the end of 2020 as developers moved forward with projects previously delayed by the COVID-19 pandemic, and commenced new projects that addressed the demographic shift accelerated by the virus. Additionally, 2021 is shaping up to be a strong year for multifamily construction, partly driven by the growing trend of building new single-family homes for rent.
After the national state of emergency declaration for COVID-19 was issued in March 2020, investment activity in the multifamily industry decreased because of heightened uncertainty, leading to a temporary slowdown in construction around the country.
The multifamily industry faced a challenging environment as the outbreak disrupted construction schedules and, in some cases, local legislators halted construction altogether to avoid spreading the virus on building sites, pausing work on many new units. Furthermore, the disruption of domestic and international supply chains brought on by the pandemic didn’t spare the construction industry. It became more difficult to acquire building materials, especially from overseas, and lumber mills reduced production or were closed because of the virus, causing prices to skyrocket for lumber and other crucial building supplies.
Investment activity returned to the multifamily industry towards the end of the year as interest rates for financing were pushed down to historic lows by the Federal Reserve to stimulate the market, making projects more attractive. Investors sitting on the sidelines also grew interested in new projects because of pent-up demand from renters for new living spaces in lower density, less-expensive markets as the economy started recovering in the second half of 2020. New construction projects were also targeted for investment because they are not reliant on current income, avoiding immediate economic uncertainty concerns.
The rate of annual completions of multifamily properties was 422,000 units in December 2020, up 32.3% from November’s rate of 319,000 units and nearly 33% from April’s 318,000 during the height of the financial crisis caused by the pandemic, according to the U.S. Census Bureau. And new permits for multifamily properties was at an annual rate of 437,000 units in December 2020, a slight decrease of 2 percent from November, but a 19% resurgence from the April rate of 367,000 units.
Additionally, the report indicated that there are 648,000 multifamily units currently under construction as of December 2020, up 60 basis points from 644,000 units in December 2019. Looking ahead, real estate data and analytics company RealPage forecasts an increase in deliveries of new multifamily units in 2021.
While the construction rebound is positive news for the country as there was a need for new supply, the multifamily industry is still being held back from a true construction boom. Lumber prices are still extraordinarily high, driving costs up to over $6,000 per typical apartment unit, according to the National Association of Home Builders. Prices for lumber doubled from the mid-$400s per thousand board feet in June 2020 to over $900 by August, impacting construction budgets. Lumber prices then dipped in the fall, but returned higher in the winter and remain high today. Prior to the pandemic, lumber prices were in the upper $300s per thousand board feet.
However, due to the elevated prices for lumber and other building materials, and the dramatic increase in demand for new housing because of the remote working trend, prices to buy new homes surged to record highs in 2020, making ownership even more unaffordable than prior to the pandemic.
While the pandemic caused more people to look for spacious homes in the suburbs, more than half (55%) of average workers in U.S. counties can’t afford to buy homes, up from 43% in the previous year, The Wall Street Journal reported. Therefore, to meet the demand of more space at a more affordable price, there’s increasing interest in the multifamily industry to build rental communities of single-family homes.
The single-family rentals trend, which had already begun prior to the outbreak, has now taken off. While the number of build-for-rent, single-family units still lag the number of for sale units across the country by a wide margin, there are more players entering the space, including traditional home builders.
Despite the various challenges that COVID-19 presented to build properties last year, including halting work on construction sites, disrupting supply chains, and dramatically elevating costs for building materials, the industry appears to be normalizing.