Builder Optimism Rises For Rental Apartments, Declines For Condos At Year-End 2005

February 9, 2006

Builder confidence in the multifamily rental market surged in the fourth quarter of 2005, with strong consumer demand becoming evident in all segments, according to results of the National Association of Home Builders’ Multifamily Housing Market Index (MMI), released today. The same survey also found that multifamily builders do not expect consumer interest in condominiums to remain as intense as it has been in the recent past. >

“A balanced and stable multifamily market offers a range of options for people who want to rent an apartment home, and for those who want to buy,” said Leonard Wood, chairman of NAHB’s Multifamily Leadership Board. “The reports of rising demand for rental apartments and increased apartment starts indicate that this sector of the housing market is moving toward better balance.”

The MMI is a quarterly, nationwide survey of multifamily builders and property owners who are asked a series of questions about current market conditions as well as their expectations for the next six months. Survey answers are assigned numerical values to calculate two separate indexes, one tracking rental demand and the other tracking the supply of rental and for-sale units. The scale is from 1 to 100, with a rating of 50 generally indicating that the number of positive responses is about the same as the number of negative responses.

All classes of apartments exhibited substantially greater demand in the fourth quarter of 2005 compared to the previous fourth quarter. The biggest increase was reported for top-tier Class A apartments, which rose 17 points on the MMI’s index from a year ago to a current index value of 62.3. Demand also was higher for both mid-range rentals and lower-rent apartments compared to a year ago, with their current index values gauged at 59.5 and 58.0, respectively

ldquo;Our survey of builders indicates such positive trends should continue over the next six months,” said NAHB Chief Economist Dave Seiders. “For the first time since the beginning of 2005, builder expectations posted an above-60 reading for every class of apartment.”

Meanwhile, the index tracking the number of apartments available for rent continued its downward trend, falling 10.5 points from an index value of 56.4 in the fourth quarter of 2004, to 45.9 in the fourth quarter of 2005.

On the supply side, builders and developers see a continuing strong market for new apartments, with lower-rent apartments the strongest, at an index value of 52.6. The index that tracks for-sale multifamily supply fell 10 points to 47.1 since last years’ fourth quarter.

In addition to the regular survey, respondents were asked special questions about condo conversions. Compared to each of the previous two years, more than twice as many respondents – 15 percent – reported having converted rental units to condominiums in 2005. And 20 percent – up from 13 percent in 2004 and in 2003 – reported that they currently are building rental units with a view toward converting them to for-sale units in the next three to five years.

The majority of those surveyed do see a “moderate oversupply” in today’s condo market, but builders in the South were those most likely to report a moderate or substantial shortage despite the fact that South Florida is generally regarded as being oversupplied with condos. Midwestern builders reported an oversupply – which may be more accurately described as an undersupply of buyers, since relatively few condos are being built in the Midwest outside of major cities.

Source: NAHB

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