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United States / Analyst Insights
Key Construction Drivers (Part 3): Multifamily Trends

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by Marisa Lifschutz, Senior Industry Analyst & Team Lead
Apr 16 2019

Multifamily residential construction activity is forecast to continue trending upward in 2019, supported by key demand driver growth. Performance for the Apartment and Condominium Construction industry (IBISWorld report 23611b), which includes general contractors responsible for constructing new multifamily residential units, fluctuates with consumers’ preference for rental accommodations.

The families renting apartments tend to be younger and smaller than the average US household and typically fall in the low-to-moderate income bracket. As a result, industry performance has a unique relationship with the health of the macroeconomic climate, leading industry revenue to ebb and flow in line with national trends in household income and wealth. Industry performance further fluctuates with changes in the rental population, housing affordability and demographic trends.

According to the latest US Census Bureau release, multifamily housing units under construction have continued to remain at decade-high levels. In February 2019, new privately owned multifamily housing units under construction reached a seasonally adjusted value of 591,000 units, a significant increase from 372,000 units in February 2014. Building permits for multifamily structures, which signal how much multifamily construction is in the pipeline, have also risen over the past five years. Although more volatile, new private housing units authorized by building permits in multifamily structures reached a seasonally adjusted rate of 439,000 units in February 2019, an overall rise from 410,000 units in February 2014. These trends indicate multifamily construction activity will continue its upward climb in 2019, supporting expected industry revenue growth of 3.1% in 2019.



Key demand drivers

Several factors support the strong demand for multifamily construction, including rising rental activity. Rental vacancy rates, which measure the percentage of all available units in a rental property, have fallen at an estimated annualized rate of 2.0% over the five years to 2019 to reach 6.8%. This decline represents a favorable shift in demand for rental accommodation services, stimulating demand for apartment and condominium construction. Industry demand is also tied to home prices as rising home prices induce more consumers to rent to save money. Over the past five years, home price appreciation has reduced housing affordability for consumers. The estimated annualized increase of 4.7% in the home price index over the five-year period supported increased demand for rental units.

Demographic shifts have also supported demand for multifamily construction. Industry performance is negatively correlated with homeownership rates, as an uptick in homeownership indicates reduced demand for rental activity. Although having risen slightly in recent years, domestic homeownership rates have declined steadily over the past decade, partially due to demographic shifts. These trends include higher immigration rates, which constitute a major driver of metropolitan and national household growth rates; much of this demand is targeted toward rental accommodations. Additionally, demand for homeownership has waned due to changes in homeownership rates for younger buyers. Demand for apartment and condominium construction has further increased as younger generations have steadily chosen apartment units in major cities, closer to employment opportunities.



Industry impact

Rising growth for the Apartment and Condominium Construction industry will positively influence demand for both upstream and downstream industries across the supply chain. For example, construction materials wholesalers, such as operators in the Lumber Wholesaling (42331); Stone, Concrete and Clay Wholesaling (42332); and Roofing, Siding and Insulation Wholesaling (42333) industries, supply multifamily residential builders with material inputs used in the construction process. Furthermore, equipment wholesaling industries such as Tool and Hardware Wholesaling (42371) and Construction and Mining Equipment Wholesaling (42381) provide industry contractors with a wide range of machinery and equipment inputs into multifamily housing construction. Both varieties of wholesaling industries will benefit from a rising demand for multifamily housing construction as general contractors will seek out wholesale supply of construction materials and equipment inputs. Additionally, upstream specialty trade contractors, such as operators in the Electricians (23821), Plumbers (23822b) and Elevator Installation and Service (23829) industries, will similarly benefit from expanding multifamily construction activity. Operators in these industries provide specialized construction services to multifamily builders as subcontractors and will, therefore, benefit from heightened downstream building activity.


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