What this means going into the slowdown.
By Wolf Richter for WOLF STREET.
Construction starts of multifamily projects, such as condo and apartment buildings, with five or more units jumped by 14.5% in 2022 from the prior year, to 529,000 units, according to data from the Census Bureau today. This was:
- Up 35% from the range between 2015 and 2020.
- Up 75% from the range in the decade before the Financial Crisis.
- The highest annual total since 1986, nearly matching the three peak-years of that boom.
- Way below the crazy boom of the early 1970s that then turned into an epic bust.
Multifamily projects tend to be big and have long lead times. Projects where construction started in 2022 were in the planning stages years earlier. So these are long-term trends.
In many densely populated cities and urban cores – think of Manhattan, San Francisco, Boston, etc. – multifamily is just about the only type of housing that is getting built, and much of it is higher end, because that’s where the money is in expensive cities. Single-family construction takes place further away from urban cores.
Construction starts of single-family houses fell by 10.6% in 2022, to 1.01 million houses, after a decade of increases that followed Housing Bust 1 which nearly destroyed the homebuilder industry.
The number of single-family starts in 2021 had been the highest since Housing Bubble 1, which became infamous for overbuilding. But beyond that, the years 2021 and 2022 were roughly in the middle of the range of the years before 2000:
Homebuilders sit on huge inventories, which is why they have cut back. Inventories of houses in various stages of construction have been piling up for two years and have now reached levels not seen since early 2008, according to data from the Census Bureau released in December – 461,000 units, seasonally adjusted. Home builders have faced a plunge in orders and large-scale cancellations of orders that they did get. So they’re heaping on incentives and mortgage-rate buydowns and what not to move the inventory they have, and they’re finishing projects that they have in the pipeline, but as an industry, they have dialed back new projects:
Single-family construction dominates. In 2022, despite the dip, single-family starts still accounted for 65% of total residential construction starts. Multifamily of 5 units and more accounted for 34%. The remaining 1% are starts of multifamily buildings with 2-4 units.
In the chart below, we can see the booms and busts in construction of single-family houses (green line) and multifamily units (red line).
The long lead times of multifamily projects – often many years for big towers – see to it that once a project gets rolling, it keeps rolling unless the developer goes bust – such as the Oceanwide Center in San Francisco, which has been a huge dreadful eyesore for years. While homebuilders can cut their plans fairly quickly, developers of big projects cannot. And that shows in the chart above. During Housing Bust 1:
- Single-family starts peaked in 2005, then plunged in 2006 through 2011.
- Multifamily starts kept going until the Lehman bankruptcy in September 2008 put a stop to everything, and starts plunged in 2009.
The slowdown shows up in single-family starts first, and well before it’ll show up in multifamily due to the long lead times with these big construction projects. Once the project has advanced enough, with financing lined up, and years of work invested in it, the projects tends to keep going.
Also there is the cyclical nature of housing and the economy. When construction on a big project starts just before or during the early innings of a slowdown, the project will have less trouble finding labor and materials, and will likely run into fewer cost-overruns and delays, and can therefore be completed for less than one constructed during boom times when everything is in short supply, including labor. And by the time the project comes to market, the slowdown is likely over. And that would be great timing. Pricing might not be where it had been imagined years earlier, but that’s always a risk.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.