Multi-family: State of the industry 2023

Home Featured Post Multi-family: State of the industry 2023

Strong headwinds in the form of surging construction materials costs and higher lending rates are threatening to stymie the multi-family housing sector. This despite the steady momentum the critical housing sub-sector has been building since early 2021.

Industry observers point to several factors impacting multi-family investments and development, including higher capital costs, rising rents and expensive cap rates. For instance, developers are becoming increasingly cautious as supply constraints have caused a large backlog of projects started but not yet completed to accumulate in the pipeline. “An emerging additional constraint is financing for new multi-family development, which 79% of developers say is somewhat or significantly less available than it was a year ago,” said FanYu Kuo, an economist at the National Association of Home Builders (NAHB). “As a result, we are projecting a significant decline in multi-family starts in 2023.”

The slowdown in multi-family housing, which is approximately 95% for-rent, is surprising when you consider the number of multi-family units under construction exceeded 910,000 in November, the highest tally of 2022, according to the U.S. Census Bureau and U.S. Department of Housing and Urban Development. During that same period, the number of multi-family permits rose 10% compared to the same time frame in 2021. NAHB’s telltale multi-family production index (MPI) had been in lockstep with the U.S. Census Bureau’s data on multi-family starts right up until late 2021—then the two indices began to diverge (see chart).

Fast forward to the third quarter of 2022—prospects for continued high levels of multi-family development and high occupancy rates declined significantly, according to NAHB’s Multi-family Market Survey. That trend is likely to persist in the early part of 2023, experts concede. “Although demand for multi-family housing remains strong in many parts of the country, some multi-family developers are starting to see signs of a slowdown,” said Sean Kelly, chairman of NAHB’s Multi-family Council. “The ongoing problems of scarcity and high cost of land and materials is making it difficult to go forward with certain projects, particularly affordable housing.”

Other economic indicators reflect a softening multi-family construction market. These include persistent interest rate hikes from the Federal Reserve, which is making the real estate landscape tougher to navigate. “I’m concerned about inflation and continued interest rate in- creases and the effect they will have on the new construction housing market,” said Brian Caress, CEO of Stafford, Texas-based Redi Carpet, the nation’s largest multi-family flooring specialist.

The biggest concern for Caress is a potential of home buyers getting priced out of the housing market, which could further impact rental demands. This could have a potential ripple effect on the entire market. “People still need a place to live,” Caress explained. “Rental housing is the best value for those who are just starting out or who are being priced out of the home buyer market.”

Nonetheless, rental growth is slowing markedly and vacancy measures are ticking up, according to Fannie Mae. This is supported by data revealed in the National Multi-family Housing Council’s Market Tightness Index, which also showed higher vacancy and lower rent growth in December 2022 compared to the three months prior.

End-user preferences

multi-familyWithin the multi-family housing market, which includes everything from apartments and condos to senior living spaces, student housing and factory-built homes, the demand for certain types of flooring is changing. “Over the last decade, there has been a continuous shift in our industry toward hard surfaces, specifically vinyl plank,” Redi Carpet’s Caress noted. “It began in the kitchen and entry areas and now has expanded into most of the living areas, although the majority of properties still install carpet in bedrooms.”

Ceramic tile consumption, not surprisingly, remains strong in both the single and multi-family construction markets. “Tile will continue to flourish everywhere that our customers understand the life-cycle and aesthetic value of durable goods,” said Dan Butterfield, vice president of residential sales.

Dwelling size is also affecting the scope of projects in multi-family construction as well as the types of materials utilized. The median size of multi-family housing units shrunk from 1,087 to 1,046 square feet from 2020 to 2021, the lowest total in at least 12 years, according to Statista, a provider of market and consumer data.

“Due to increasing rent structures across the market, we’re tending to see smaller unit sizes in an effort to somewhat buffer escalating rents,” said Randy Rubenstein, owner of Seattle-based Rubenstein’s Contract Carpet/North American Terrazzo, a key player in the local multi-family market. “But that really doesn’t affect us as the total square footage of the buildings remains the same. They’re just building more units into the same size structures.”

There are other underlying factors that influence flooring selection—namely product availability after months of supply chain struggles. “However, the current situation has improved in recent months and should continue to improve in 2023,” said Doug Kenney, vice president of sales, builder + multi-family, Shaw.

In the short term, the slowdown in new construction is expected to reduce some of the supply chain issues facing the flooring industry. “We have worked diligently to mitigate any problems related to product supply,” Kenney stated.

Outlook for 2023

multi-familyDespite the clear and present challenges facing the multi-family sector, there are silver linings amid the cloud cover. The easing of eviction moratoriums and property rent growth, for example, has created an uptick in demand for replacement flooring and capital improvement projects—especially in corridors and common areas of multi-family communities, Redi Carpet’s Caress observed.

Another dynamic that stands to impact multi-family consumption is generational activity. For example, as Baby Boomers continue to age, demand for senior housing is expected to grow. Likewise, as more Millennials and Gen Zers leave their nests, a high number of potential renters and homebuyers are entering the market. “Increasing numbers of Millennials and others are expected to become homeowners by choosing condos as attractive alternatives to higher-priced single-family homes,” said Sarah Martin, senior economist at Dodge Construction Network.

Commercial flooring contractors like Rubensteins in Seattle are encouraged by the growth the multi-family housing sector exhibited in 2022. “This market sector is fairly set for 2023, even with the constant background noise of recession as permitting and funding, as well as commencement of actual construction, have mostly begun.”

Optimism even exists among the supplier community. “Multi-family and build-to-rent should be relatively strong in 2023 as families still need housing,” Brian Dolfi, Mohawk’s senior vice president, builder + multi-family, pointed out.

Shaw’s Kenney concurred: “We are going to see a downturn, no doubt. But the fundamentals are still there.”

Must Read

Mannington Commercial names Cindy Kaufman VP, marketing  

Calhoun, Ga.—Mannington Commercial has named Cindy Kaufman its new vice president of marketing, effective today. In her new role, Kaufman will be responsible for...

Jorge “Tito” Boror inducted into NWFA’s Legacy Scholarship Program

St. Louis, Mo.—The National Wood Flooring Association (NWFA) has inducted the late Jorge "Tito" Boror, past business manager at LOBASAND, into its Legacy Scholarship...

Wider, longer hardwood planks maintain momentum

Consumer demand for broader, beefier hardwood planks —those products starting and 6 ½ inches wide in lengths exceeding 5 feet— continues to gain steam...

New single-family home size trending lower

Washington, D.C.—An expected impact of the virus crisis is a need for more residential space, as people use homes for more purposes, including work....

CRI names Russ DeLozier president

Dalton—The Carpet and Rug Institute (CRI) board of directors has named industry veteran Russ DeLozier as the next president of the CRI, the leading...

The path to success isn’t always a straight line

I’m a big fan of golf. In fact, it’s probably my favorite sport next to basketball. Some people might think it’s boring, but I...

As seen in

Feb. 6/13, 2023

Some text some message..