But small multifamily buildings with 2-4 units dodge to CRE depression.
By Wolf Richter for WOLF STREET.
Housing construction starts in 2024 split into two opposing dynamics: Starts of single-family properties rose to the second highest level since 2007, while multifamily starts (condos and apartments) plunged for the second year in a row, both years combined by 35%, from 2022, which had been the highest level since 1986.
Single-family construction starts in the year rose by 6.5% to 1.01 million properties, the second highest since 2007, behind only the boom year 2021, having more than doubled from 2008-2010, according to data from the Census Bureau today.
For the past five years, single-family starts have run at very high levels, and unsold inventories have now piled up massively.
The pace of construction was such that it outran sales by a wide margin. Inventories of completed houses piled up to highest level since 2009; and inventories of houses at all states of construction, from not started to completed, piled up to the highest level since 2007. Homebuilders cut prices and threw incentives at buyers in 2024 to keep up their sales, and sales were brisk, but construction was brisker, and inventories continued to build. Bring on the supply!
But multifamily construction starts plunged by 25% in 2024 from 2023, to 354,800 housing units, and are down by 35% from the boom year 2022, amid the large-scale oversupply that has been piling up in many markets for a few years, and amid the general depression in Commercial Real Estate, the long series of big CRE debt defaults, the losses investors and lenders have taken, the difficulty in getting new financing to start a multifamily project, and the impossibility in many cases to make those interest rates work with the expected rents.
Nearly 99% of these housing units were in buildings with 5 or more units. Only 1.3% were in small buildings with 2-5 units. More in a moment.
The multifamily construction boom rose from the ashes of the Housing Bust, and by 2014 construction starts ran at multi-decade highs, culminating in 2022 with 547,400 starts, the highest since the boom-year 1986. Despite the two-year plunge, starts were still at relatively high levels.
Multifamily projects tend to be big and have long lead times. Projects where construction started in the recent peak year 2022 were in the planning stages years earlier. Many projects that had been planned but not started became stalled due to lack of financing as the CRE depression spread around. These projects are now on hold, without having started and are not part of this data. They’re further up in the development pipeline and are waiting for better days.
Small multifamily buildings, despite the plunge in overall multifamily starts, saw sort of a revival. Starts in buildings with 2-5 units rose by 36% in 2024 to 18,200 units, the highest since 2007.
Obviously, the numbers are minuscule compared to the 1980s and 1970s, but that’s the part of multifamily that seems to have dodged the CRE depression.
In densely populated urban cores, higher-end multifamily (condos and apartments) is just about the only type of housing that is getting built. With higher-end apartments, builders are targeting “renters of choice” – people wanting to live in a modern high-rise in a central location with all the amenities and conveniences and a short commute. Unless multifamily is subsidized, developers cannot cater to lower-income tenants or buyers because the numbers just don’t pencil out at current construction costs.
Single-family construction, now spreading further away from urban cores, includes the hottest trend in housing construction: “build to rent” developments designed specifically as rentals mostly for “renters of choice,” and built either by large single-family landlords or by builders that then fill the developments with tenants and sell the income-producing project to large landlords, pension funds, and other funds. The developments have common amenities, such as a pool, green spaces, a leasing and maintenance office, etc., and are much more efficient to manage for the landlord than individual houses scattered across their market.
Total housing starts dropped by 3.9% in 2024, to 1.36 million housing units, squeaking past 2007, and higher than any year in the 2007-2019 period:
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It’s not the construction costs of close in housing that stands in the way of developers producing affordable units. It is the price of the dirt underneath the building that is the problem.
Could be the reason the lots are getting smaller.
It’s always in the dirt. Materials and labor are what they are. That’s why last bust finished lots were selling for less than 10 cents on the dollar, and raw land couldn’t even find a bid.
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I’m surrounded with new homes being built and there are builder signs everywhere along the roads. Thousands of new homes going up around me and they all will be 1.200 – 2.500 square feet in size. All “builder grade stuff”.
Too bad Rod Sterling was not alive as he could make a Twilight Zone session out of this.
Forests being taken down in one fell swoop, tree and stumps ground up into saleable mulch, ancient topsoil stripped off and sold, and red clay brought in to replace the old dirt.
It’s crazy here……(south Texas)
I moved to Texas in 2021, and I cringe every time I see that happen. Beautiful land, beautiful large/mature trees, and then 2 days later…BAM!!! It looks like a dessert with piles of mulched up trees. Like a hurricane came by, leveled it all, then a tornado stopped by and whipped up the piles.
The building has slowed here in North Texas when compared to a few years back. Some projects pulled back their phases, and the “Homes from the $###,####” signs stopped being changed. In 2021, a development nearby started at $800K. Every 3 months, the signed was updated to add $100K. By the time they had sold 90% of the development, the sign said $1.6M. They’re just about finishing the last homes.
A different development was scheduled to deliver homes in early 2025. Back in the Fall of 2023, they bulldozed the land, cleared it all, surveyed all the lots, started bringing in utilities, and then it just stopped. I drive by it every day, still no foundations being poured.
50 or so miles outside DFW, they are building like crazy. Similar to what you wrote about South Texas. The Metro keeps growing, it’s amazing how towns just sprout out of nowhere.
I’ve been saying all along that people want smaller, single family homes. Isn’t that the American dream? Especially now that most families have far less children.
Not in Beverly Hills.
I’d like to buy a 2br/1ba but it doesnt make sense when only 3br/2ba or bigger is built and they cost marginally more than a 100 year old mining town hovel.
But that doesn’t make financial sense.
My first house was a 2 br/1ba. A 850 sqft 1939 bungalow. I loved that house, even though it needed a ton of work. Perfect for 1 person, a bit cramped with two. 3br are for families.
Tic tic boom
Great info, thanks Wolf.
I’ve passed on nearly every multifamily deal for funding in the last 5 years. Numbers just didn’t work. Even before the interest rate hikes. Folks have been way overpaying for used and new multifamily since 2018. Land costs have been at historical highs so this has prompted builders to go for density to maximize profits.
New construction, private money lenders have struggled to get paid off the past 2.5 years after funding the construction of multifamily projects.
Projects got completed after rates went up and couldn’t find a long term refinance. But still plenty of buyers looking for a place to park their dumb money and pray for appreciation. And no shortage of Realtors peddling overpriced, 4 cap (lol ;) multifamily, apartment complexes.
I wonder how much of the single family construction are BTR investors?
Build to rent (BTR) has been growing very rapidly and is approaching 100,000 starts in 2024. In Q3 alone, it was already at 24,000 (+40% yoy). Q4 figure not yet circulating. So maybe 9% of total single-family starts in 2024.
The big single-family landlords have all been selling their scattered individual houses, of which they have 10s of thousands, and that are really hard to manage, and they’re slowly switching to BTR. Their conference calls are really interesting.