The prospects for continued high levels of multifamily development declined significantly in the third quarter, as did the prospects for continued high occupancy rates, according to results from the Multifamily Market Survey (MMS) released by NAHB. The MMS produces two separate indices. The Multifamily Production Index (MPI) decreased 10 points to 32 compared to the previous quarter while the Multifamily Occupancy Index (MOI) fell 15 points to 45.
The MPI measures builder and developer sentiment about current production conditions in the apartment and condo market on a scale of 0 to 100. The index and all of its components are scaled so that a number below 50 indicates that more respondents report conditions are getting worse than report conditions are improving. Even though both indices are now below the break-even point of 50, both multifamily construction levels and occupancy rates remain quite high compared to historic norms.
The MPI is a weighted average of three key elements of the multifamily housing market: construction of low-rent units—apartments that are supported by low-income tax credits or other government subsidy programs; market-rate rental units—apartments that are built to be rented at the price the market will hold; and for-sale units—condominiums. All three components saw decreases compared to the second quarter: The component measuring low-rent units fell nine points to 36, the component measuring market rate apartments dropped 13 points to 39 and the component measuring for-sale units declined 10 points to 23.
The MOI measures the multifamily housing industry’s perception of occupancies in existing apartments. It is a weighted average of current occupancy indexes for class A, B, and C multifamily units, and can vary from 0 to 100, with a break-even point at 50, where lower numbers indicate decreased occupancy. The MOI fell 15 points to 45, the lowest level since the first quarter of 2010, with the exception of the onset of the pandemic in the spring of 2020.
“Although demand for multifamily housing remains strong in many parts of the country, some multifamily developers are starting to see signs of a slowdown,” said Sean Kelly, executive vice president of LNWA in Wilmington, Delaware, and chairman of NAHB’s Multifamily 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 projects.”
“Multifamily developers are becoming cautious, as supply constraints have caused a large backlog of projects started but not yet completed to accumulate in the pipeline,” said NAHB chief economist Robert Diez. “An emerging additional constraint is financing for new multifamily development, which 79% of developers say is somewhat or significantly less available than it was a year ago. NAHB is now projecting a significant decline in multifamily starts in 2023.”