Apartment Construction at 50-Year High? Yes, But … Not Really

You’ve probably seen the headlines or heard the chatter: Multifamily construction is at the highest levels in 50 years. There are about 1 million multifamily units actively under construction nationally. But to say multifamily construction is at a 50-year high is equally true and terribly misleading. Why? Three reasons.

1. There are roughly 2.5 times more multifamily units in the U.S. today than there were in 1970.

So that means 1 million units today has nearly one-third the impact that it had back in the early 1970s. In other words: The total number of units under construction doesn’t tell the full story. It’s the relative expansion rate that matters more. At peak, new supply expanded the U.S. multifamily stock by 6.5% in 1973. At peak in this cycle, the inventory expansion rate will measure 2.2%, according to analysis of U.S. Census Bureau data.

Think of it this way: Let’s say two people get a $6,000 raise. One was making $50k and the other was making $100k. While they saw the same nominal increase, one’s salary grew by 6% and the other by 3%. That’s typically how we think about changes in salary, and it’s a better way to think about changes in apartment supply, too.

2. Multifamily starts have consistently come in around half the levels seen in the early 1970s.

In fact, in this cycle, starts peaked just a hair above 600,000 units. By comparison, back in 1973, annualized multifamily starts peaked at 1 million units. And starts consistently topped the 600,000 unit mark for three straight years.

Multifamily starts back then were generally smaller projects that could get approved and built much more quickly than today’s projects. So that means that projects today linger around in the total construction count longer.

3. Today’s population is much larger than in the 1970s – so today’s construction is delivering to a much larger potential renter base.

There were 70 million adults between the ages of 25 to 54 back in 1970. Today, there are nearly 130 million.

Yes, the 1970s/1980s supply surge benefited from Baby Boomers reaching adulthood. But there are roughly the same number of Millennials, and we never built for them at nearly the same levels – despite the fact that Millennials are often choosing different cities and neighborhoods than their parents did, necessitating the need for more housing in different spots. (This is one of the many fallacies of the “oversupply” crowd, whose arguments usually assume that everyone reaching adulthood will choose the same housing in the same locations as did prior generations.)

With all that said, it’s important to state the obvious: We are building a lot of apartments. That will impact fundamentals, especially these next two years.

But I rarely see even industry experts putting the “50-year high” number in proper context. In our view, it’s not the total number at a macro level that is worrisome. We need more housing.

Rather, it’s the spots with construction expanding the multifamily stock at much higher rates, like 10%+ in many submarkets and a few markets, especially because most of this construction targets the top quintile of renter household incomes. Demand will eventually catch up to supply, but there will almost certainly be a short-term supply and demand imbalance.

It’s going to be a tough road for many developers delivering lease-ups in 2023 and 2024. But, in most cases, it probably doesn’t compare to what developers in the 1970s and 1980s experienced.