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Regulatory and supply-side challenges combined with slowing rent growth and rising vacancy rates will weaken the multifamily construction market this year, according to National Association of Home Builders economists during the virtual 2021 NAHB International Builders’ Show.

“Though the multifamily sector is performing much better than nonresidential construction, developers are facing stiff headwinds in 2021,” says NAHB chief economist Robert Dietz. “Shortages and delays in obtaining building materials, rising lumber and OSB (oriented strand board) prices, labor shortage, and a more ominous regulatory climate will aggravate affordability woes and delay delivery times.”

Multifamily starts are expected to fall 11% this year to 349,000 units. This is down from 2020’s 392,000 units, which were only 2% off the peak in 2019. However, this year’s downturn is expected to be short-lived, with NAHB predicting multifamily production will see moderate gains next year, up 5% to 365,000 units.

“One of the biggest challenges that builders tell us that they see in terms of the marketplace coming out of the pandemic crisis, the No. 1 issue by far is shortages and delays associated with building materials,” says Dietz. “Lumber is obviously the hot topic, but if you ask builders, apartment developers, remodelers, it is taking longer for those building materials to arrive, and that is extending construction times and increasing costs.”

In terms of lumber, the construction industry saw increases from mid-April to mid-September, getting above $955 per thousand board feet, declines for a couple of months, and then essentially prices getting higher again. According to Dietz, weekly data puts it near $950 per thousand board feet.

“This is the top issue, it affects the multifamily market, especially the stick-built multifamily sector, which is one of the areas where we see some relative strength—garden-style apartment and low-rises,” says Dietz, noting that it is adding thousands of dollars to individual unit costs and taking longer for lumber to arrive.

For 2020, NAHB analysis of Census data shows that 34% of total multifamily construction happened in lower-density, lower-cost markets. “These areas have outpaced higher-density markets over the past four quarters, and we anticipate this trend will continue this year,” he says.

As for rents, growth flattened last year after four years of an upward trajectory, according to Danushka Nanayakkara-Skillington, NAHB’s assistant vice president of forecasting and analysis. “Due in part to pandemic-related issues, rent growth in December was up just 0.4% from a year ago.”