As the multifamily industry has rebounded from the Great Recession, policymakers, pundits and the press have followed closely the industry’s swift recovery. However, whereas the uptick in new multifamily construction activity had once been seen as a positive indicator of an industry rallying to meet demand and an economy getting back on track, the conversation has more recently turned into a discussion of whether new apartment supply is actually meeting the nation’s rental housing needs or just catering to the upper-class tranches of the renter market.
To begin to address this question, we need to first look at supply versus demand. Despite some significant jumps in multifamily construction activity, the total amount of new units coming available is able to meet only a small portion of the growing demand. In fact, from 2009 through 2013, multifamily completions totaled 880,000 units while growth in total renter households topped 4.2 million.
This means that not only is the industry still trying to dig out of a hole created by chronic underbuilding during the recession, but overall demand is outpacing the apartment industry’s ability to produce new units. This imbalance inherently creates a scarcity that drives up rental pricing. Moreover, rising development, materials, labor and operations costs also continue to provide upward rent pressure at the same time that household incomes have stagnated.
While we’re already seeing market-rate rent growth moderating in some areas as new apartment supply hits the market, there’s little debate that affordability continues to be an issue for many of the nation’s renters. The number of cost-burdened renters (those spending more than 30 percent of their incomes on rent) has grown to 20.6 million in 2012, with more than half (11.3 million) qualifying as severely cost burdened, according to the Harvard Joint Center for Housing’s State of the Nation’s Housing 2014 Report.
With the shortage of affordable rental units for low- and moderate-income households worsening, the nation’s challenge is to figure out how to expand the stock. The solution requires a three-pronged answer: preservation, rehabilitation and new development.
- Preservation means ensuring that the financing and
subsidy programs that currently keep units available at below market rents
continue to be there in the future, providing some degree of certainty in the
affordable housing market. This means not only stemming budget cuts for local,
state and federal housing programs, but also establishing continued support for
programs like the low-income housing tax credit (LIHTC), which is arguably one
of the most effective affordable housing programs.
Between 1987 and 2013, the program has helped finance the construction of more than 1.3 million affordable housing units and the rehabilitation of another 783,000 units, according to Harvard data. However, in the next decade nearly 1.2 million LIHTC-subsidized units will reach the end of their compliance periods; renewed subsidies will be needed to maintain many of those units in the affordable stock.
- Rehabilitation is extremely important because it can keep existing apartment stock from dwindling further. Every year, the industry loses between 100,000 and 150,000 units a year to obsolescence and other factors. Most of those units are at the lower end of the market, disproportionately hurting the affordable portion of the market. Consider also that the nation’s apartment stock is aging; in fact, more than half (51.9 percent) of all apartments were built before 1980. Without resources dedicated to support rehabilitation efforts, more stock will evaporate from the available pool.
- New development is the third strategy for addressing the scarcity of units available for the population of Americans whose household incomes are below the average for their areas-and the one garnering a lot of attention and criticism. To many industry outsiders looking at the apartment building boom of the past few years, it seems like a simple fix: Build cheaper apartments. However, for developers, this is a proposition far more nuanced than, say, cutting their profit margins to try to produce units that lease at more affordable rents.
Too often discussion on how to address the shortage of affordable units is myopic, entirely too focused on new development as the sole path to expanding the available supply of units. However, the nation can’t just build its way out of this problem. A more comprehensive approach that incorporates and builds off of existing assets in the market will be the swiftest and most effective way to begin to directly address some of the areas of most acute need while the larger multifamily market has an opportunity to naturally rebalance.
However, stay tuned, because as a follow-up, my next blog post will focus on why the multifamily industry can’t just build less expensive apartments.
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