Contact Name: Mark Obrinsky
Contact Phone: 202/974-2329
Contact E-mail: mobrinsky@nmhc.org

APARTMENT CONSTRUCTION IN CITIES AND SUBURBS
Multifamily Picks Up Market Share

The strong economy of recent years has brought an increase in construction of most types of housing, including apartments. One aspect of this economic vitality has been a re-invigoration of the housing markets in many of the nation's biggest cities. Across the country, apartment construction in close-in neighborhoods is being undertaken at a pace unmatched over the past 10-to-20 years.

Evidence to date on the pickup in urban multifamily construction has been largely anecdotal. This issue of Research Notes moves beyond the anecdotes to take a more systematic look at what has been happening to housing construction in the central cities and suburban rings of the nation's 50 largest metropolitan areas.

We find that not only has residential construction increased in recent years, but the location and mix of construction have shifted also. Central city construction has increased faster than has suburban construction, and apartment construction has gained market share from single-family construction, especially in big cities. Going forward, it seems likely that multifamily will maintain or increase its recently higher share of all new residential construction.

This report summarizes a more extensive analysis that is available under "Related Content."

City Construction Gains Outpace the Suburbs
The mid- and late 1990s were good years for housing construction. As measured by building permits, the number of housing units (single-family and multifamily combined) built each year increased 75 percent from the trough in 1991 to the decade high in 1999. Permit issuance in the 50 biggest metro areas, which account for roughly half of the nation's housing construction and a larger share of all apartment construction, increased a similar 102 percent from trough to peak.

Central city construction in these 50 largest markets increased more rapidly during the 1990s than did suburban construction. As a result, central cities' market share of metro area permits rose from 17 percent to 21 percent over the decade.

Multifamily's Rising Share
Early in the decade multifamily construction lagged behind the pickup in single-family construction, but after 1993 multifamily housing gained market share at the national level and in the 50 biggest markets. (Note: Multifamily is defined here as housing units in structures with 2 or more units. Most of these are rental apartments, although about 20 percent are for-sale condominium units. In this report, "multifamily" and "apartment" are used interchangeably.)

While multifamily's market share nationally has been fairly steady for the past three years, in big cities the mix of construction has continued to shift toward multifamily. By 1999 multifamily's share had reached 55 percent, up from only 33 percent in 1992.

Several related factors help explain these shifts toward central cities and apartment construction. The nation's demography is becoming more favorable toward multifamily housing demand, with renewed growth in the number of young adults and an increasing tendency of adults of all ages to live on their own. These consumers often favor close-in locations, especially as traffic woes continue to mount in many of the nation's biggest metropolitan areas. And in some jurisdictions, concerns about sprawl have made local officials more open to in-fill residential development, in particular higher density housing near existing public transportation.

Cities and Multifamily: Procyclical?
The combined totals for the 50 largest metro areas mask some noteworthy patterns across individual areas. First, while big cities and their suburbs increased production during the 1990s, the experience was far from uniform across metro areas. Even within metro areas the paths of cities and their suburbs were not always closely linked. For example, the bottom right dot in the preceding chart represents the New Orleans metro area, where city construction increased 662 percent while suburban construction increased only 65 percent.

Second, as shown in the full research report, cities in metro areas with the biggest 1990s construction increase tended to fare best (as measured by increase in construction) relative to their suburbs. This is evidence that big cities receive a greater share of metro area construction in good times than in bad. Because multifamily construction is concentrated in cities, the implication is that the same can be said for apartment construction.

Prospects for the Future
Trend and cyclical influences will continue to determine the share of new housing construction going to multifamily structures and to central cities. As for multifamily, a number of long-run demographic, economic, and policy influences, including those mentioned above, will likely continue to favor higher density housing, meaning more multifamily and more small-lot single family, both in cities and suburbs.

The trend for central cities is less clear. Even with the boom of the 1990s, job growth in the cities was slower than that of the suburbs. And the national migration statistics do not show any major changes in the numbers of people moving into and out of central cities each year.

Cyclical influences on construction and cities are also important, but easy to forget after nearly nine consecutive years of expansion. If the strong, steady economic growth of the 1990s has been disproportionately good for cites, will an economic slowdown be disproportionately bad? And if cities do lose market share, multifamily may too, because of the central city concentration of apartment construction. But the multifamily share should be fairly resilient in an economic downturn, because the pure location effect is moderate and because a soft economy may cause some prospective home buyers to postpone that major purchase, thereby bolstering consumer demand for apartment living.