What’s Happening To The Multifamily Rentals In The United States?

There’s no doubt that construction in the Houston Texas area has been on the rise in recent years but one of the noticeable problems that we’ve seen occurring is that there have been fewer and fewer small, multi-family buildings constructed each year.

In 2017 for example, there were 358,000 multifamily buildings constructed in the United States but these units were all large multifamily properties of 50 or more units. When it comes to smaller multifamily buildings there were only 27,000 units constructed.

What’s Happened To Smaller Multifamily Rental Properties?

Why the big change in multifamily units constructed in the United States? The change in the construction of multifamily properties can be traced back to the demand for rentals nationwide and the fact that most renters want more in their rental properties than they did 30 years ago.

Much of the shift has to do with the rise of no-growth, not-in-my-backyard politics since the 1960s. This political movement has been strongest in homeowner-dominated suburbs, and as a result, as BuildZoom chief economist Issi Romem showed in a remarkable study earlier this year, almost all the housing construction in expensive, space-constrained coastal metropolitan areas such as Boston, Los Angeles, New York, San Francisco and Seattle is now happening in and around established urban centers.

 The residential suburbs of these areas have effectively gone dormant, shunting new construction to the neighborhoods — mostly in or near old urban cores — where the neighbors either don’t object (because they’re in commercial buildings) or don’t have much political clout (because they’re low-income renters), and local elected officials see benefits in a growing population. In such places, big apartment buildings generally make more sense than duplexes. Also, as barriers to new construction — land costs, labor costs, permitting costs, zoning rules, Nimby opposition, etc. — have risen, the threshold project size needed to turn a profit has increased even in less expensive metro areas.

Another factor is that limited partnerships, limited liability companies, real estate investment trusts and the like have taken over from individuals as the dominant players in multifamily housing, and these institutional investors tend to be more interested in (and capable of) developing big projects than in building fourplexes here and there. Non-individuals owned 71 percent of all rental units in multifamily buildings and 94 percent of those in buildings with 50 or more units in 2015, when the Census Bureau last asked around, and those percentages have been rising since at least 2001. It’s apparent in the above charts (especially the third one) that the shift from small multi-unit buildings to big ones accelerated after the mid-1990s, which happens to be right after the Resolution Trust Corp., the government entity charged with cleaning up the aftermath of the savings and loan crisis, went to great lengths to create an institutional market for such properties.

There is surely also an element of changing consumer taste at work here, with more Americans wanting to live in tall buildings close to amenities, jobs and public transit than was the case 30 years ago. But I don’t think the drop from 498,000 apartments built in two-to-19-unit buildings in 1973 to just 59,000 in 2017 can be explained purely in demand terms. There is clearly a supply problem here.

Will we see any more small multifamily properties built in the coming years? They obviously will still continue to be built but not as much as in the 1970’s or 1980’s so if you have the opportunity to buy one, you shouldn’t hesitate to purchase it because they make great investment properties!

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