Renter Nation: U.S. Multifamily Construction and Seattle’s Development Spree

by | 08 October 2015

The United States’ progress towards becoming a renter nation has grown over time, and lately it has been moving quickly away from historic norms. The typical benchmark, homeownership, is a lagging indicator. Leading-edge data suggests that the American predilection—or necessity—for renting continues to accelerate.

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Although this is welcome news for the apartment industry, supply-demand imbalances must receive more than acknowledgement. Study and respect is warranted, lest the pendulum swing too far and upset the balance of rental and vacancy rates.

Beyond the data of homeownership versus renting are myriad factors that affect the apartment industry and the broader economy, not the least of which include:

  • Competition for labor and materials
  • Construction employment leading to job growth and consumer spending
  • New household formation, leading to consumer spending

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Let’s take a look at national trends, then at the Seattle/Puget Sound market—my area of operations.

Single-Family Home Starts

Single-family home starts are dismal, and that is putting it lightly. As of July 2015, new starts are almost half of historic norms and a third of the peak in 2005. Recent data suggests growth, yet fundamentals such as wage growth and credit acceptance continue to provide barriers to new buyers.


The lagging indicator is actual ownership rates. The US market has shed roughly 5.5 million homes from the ranks of home ownership. The current level of 63.5 percent is well below the 35-year rolling average of 65.0 percent—and dropping. Looks like a good time to build apartments!


Multifamily Starts

The shimmering economic light you see is the sun glistening off hammers as they construct apartment buildings. A sharp rise from the ashes of the Great Recession continues to climb north, with apartment starts this year poised to best the previous peak from 2007.


By juxtaposing apartment starts versus single-family starts, we can see the doldrums of single-family housing construction. Lennar, one of the nation’s largest homebuilders, recently invested in a $1.1 billion joint venture to build apartments. That is a pretty good indicator as well.


Historical Trends

Over the last 20 years, the multifamily industry has built about 250,000 apartment units a year. As a point of reference, that’s the approximate size of the inventory of apartment units in Puget Sound. Although apartment starts have been robust since 2010, the industry didn’t break past the average until 2013.


What about Seattle?

Seattle is on a development spree in the construction of new apartments, and that isn’t news. On a percentage basis, the Seattle-Tacoma-Bellevue Metropolitan Statistical Area has issued 44.6 percent more apartment permits year-over-year, yet it is down 4.2 percent in single-family permit issuance. Apartments remain hot and single-family construction is not. Multifamily development is accelerating to seemingly stratospheric levels.

But here’s what some might not consider: Between 1985 and 1992, over 80,000 units were delivered in the region. If you take new supply delivered since the end of the Great Recession (2010) and add projected units through 2019, the region’s deliveries equal roughly 80,000. Although the numbers are staggering, adjusting for population increase, the current bull-run is less than the supply delivered in the last cycle.


So what else is different this cycle? A lot. Development during the last cycle found its beginning in huge shifts of monetary policy and found its demise in tax reform, savings and loan collapse and a shake-out of the Resolution Trust Corporation. This time around, the cycle’s beginnings were founded in grass shoots from a recession, $3.5 trillion in quantitative easing and massive demographic shifts which reflect changing housing preferences.

What is most different? We are not slowing, at least not in Seattle. Every week, a new market entrant calls me to discuss finding a site. When will the music stop? We don’t know yet. However, students of the market should have a strong sense of where to find value—and safety.

My apartment investment sales team, comprised of four highly qualified professionals, and a back-office team of an additional four dedicated staff, specializes in assisting apartment owners in maximizing returns. Give us a call to discuss the current market dynamics in Seattle and how to position both your developments and your assets for the highest level of returns. Allow us to turn our expertise into your profit.

Note: A special thanks to Anirban Basu of Sale Policy Group, Inc. for a recent presentation and use of materials.

Dylan Simon is a hobbyist technophile and self-taught urbanist. For more, follow his blog and connect with him on Twitter and LinkedIn.