Total multifamily housing starts (for properties with five or more units) in 2021-2022 was the highest two-year total since 1985-1986, according to data from the U.S. Census Bureau. This recent influx of new properties is causing many in the affordable housing community to review recent trends in market rate multifamily rental rates and assess the derivative effects on low-income housing tax credit (LIHTC)-financed properties.

To begin to assess the issue, we compared total private housing starts–multifamily and single-family–to new household formation over time. While certain factors are excluded (such as that housing starts do not include public housing or military housing and that the number of new homes created is a gross number and doesn’t subtract housing that went offline), a comparison of the volume of new homes being built with the number of additional households is instructive.

If the nominal annual increase in households exceeds the annual increase in new homes, then there is upward pressure on rental rates and downward pressure on vacancy rates. Conversely, if the annual increase in supply exceeds additional households, the opposite is true.

Let’s look at the data.

Supply

Based on Census Bureau seasonally adjusted annualized figures from December 2022, last year there were 483,000 multifamily starts (for properties with five or more units), on the heels of 553,000 such starts in 2021. Those are the two highest single-year totals since 1986. Note, the high volume wasn’t purely due to pandemic-related delays. Looking back two years, the 2019 total of 511,000 was the highest total since 1986 until it was surpassed by 2021 and 2022.

Total housing supply goes beyond multifamily, and includes single family. According to the Census Bureau, there were nearly 1.4 million total housing starts in 2022 (meaning nearly 1 million single-family starts), which again is slightly lower than the previous year but significantly higher than any other year between 2006 and 2019–with 2006 being when the U.S. was experiencing a housing boom just ahead of the Great Recession.

For the overall market, the increase in 2022 added about 1% to the national housing inventory, according to Census Bureau numbers. For multifamily properties the percentage increase was even greater: According to National Multifamily Housing Council, the addition of the 2022 properties (once they all come online) will mark a 2.2% increase in inventory.

As noted earlier, some housing properties undoubtedly went off the market during this time, which is not accounted for in this information.

In short, the past three years saw the greatest increase in gross housing supply in more than a generation.

Demand

A central factor in assessing the changing annual demand for housing is the annual change in the number of households.

Over the past three years (2020-2022), the number of households in the U.S. increased by 3.4 million, which is generally in line with recent history. This 3.4 million increase in households is 1.4 million less than the 4.8 million new housing starts over the same period. That marks a clear recent trend of housing supply growing faster than demand. However, over a five-year period, there were 8.1 million new households and 7.4 million housing starts, a shortfall of new housing of 700,000. Over a 10-year period, there were 14.8 new households and 13.1 million housing starts, a 1.7 million shortfall in new housing.

In summary, the three-year trend is more new housing than new households. The five-year and 10-year trends are new households outpacing new housing.

The recent three-year trend creates downward pressure on rents, and this pressure is reflected in the rental rate data: January 2023 was the fifth straight month that the national average multifamily unit rent decreased, according to technology company Apartment List. Looking over a 12-month horizon, the effective monthly rent for market-rate apartments in 2022 was $1,612, according to leading real estate information and analytics company CoStar. That was a 3.7% increase over 2021, as compared to the 2022 annual inflation rate of 6.5%. The 2022 annual increase of 3.7% comes on the heels of an 11.0% increase in average multifamily property rent for 2021, meaning the 2022 numbers reflect a flattening of an ambitious upward curve.

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The recent three-year trend also creates upward pressure on vacancy rates, and this is reflected in vacancy rates data: Vacancy rates hit 6.1% in January according to Apartment List, the highest such rate since the early months of the pandemic in 2020, when many Americans consolidated their households due to economic uncertainty. Looking to a full year 2023, CoStar predicts a national multifamily vacancy rate of 7.5%, which would be the highest such rate since 2009 and the first time since then that the rate topped 7%.

Effect on LIHTC Properties

In underwriting LIHTC properties, a common underwriting benchmark is for LIHTC maximum allowable rents to be at least 10% below market for comparable units, with a much larger gap being more desirable. This underwriting minimum guideline creates a cushion for times when market rents decline–such as happened in recent months–but causes concern when the gap between market-rate rent and LIHTC rent dips below 10%.

The good news is that a sub-10% gap hasn’t appeared yet in Novogradac market studies. In 20 recent such studies conducted by the Novogradac valuation team–which conducts more than 2,500 market studies annually–every market saw a gap of at least 11% and 16 of the 20 markets saw a gap of 20% or more. Those markets were from a diverse mix of locations, including Houston, Brooklyn and Oakland, California; but also including Rocky Mount, North Carolina; Butte, Montana; and Shelbyville, Indiana.

However, individual results may vary. It’s possible that some areas may see a growth in housing starts that’s significantly greater than the growth in the number of households. In that case, LIHTC properties could struggle.

What About a Recession?

Hanging over all economic discussion is the threat of an economic recession: What happens to housing–including affordable multifamily–if there’s a sustained economic downturn?

First the definition: The National Bureau of Economic Research Business Cycle Dating Committee (considered by the federal government to be the official recession scorekeeper) defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than few months.”

The COVID-19 pandemic caused at least a mini-recession and during that time there were some decreases in market-rate rents. However, studies done by Novogradac of more than 100,000 individual properties showed that as of late 2020, LIHTC properties serving tenants earning 60% of the area median income (AMI) or less had fared well: 53% of such properties saw no change in rent compared to pre-COVID levels, while 38% saw an increase and 8% saw a decrease. Tenants in market-rate housing were three times more likely to see a rent decrease than LIHTC tenants, evidence that LIHTC rents remained fairly stable.

By the end of 2021, LIHTC occupancy was at a record high (98.5% for two-bedroom properties for tenants earning 60% of AMI or less), according to data compiled by Novogradac, and LIHTC rent had grown at a rate of 2.3% and 6.1% over 2020 and 2021.

A look at the Great Recession of 2007-2009 is informative, if not predictive. During the biggest shock to the American financial system since the Great Depression of the 1930s, national median household income dropped and worry increased that multifamily properties (including LIHTC-financed) would face difficulties. That didn’t happen, partly due to the unique nature of the Great Recession: The bursting of the housing bubble increased the number of renter households and led to only a minor dip in market-rate rents. In 2007, the average rent was $968 and in 2010, it was $943 (a 3.5% drop). By contrast, the average home price in that same period dropped from $254,000 to $218,000 (a 14.2% decrease).

Among LIHTC properties, occupancy level dropped briefly in 2009, then recovered quickly, according to data compiled by Novogradac. Those properties went from 96.3% occupancy in 2008 (for two-bedroom LIHTC properties occupied by residents earning 60% or less of the AMI) to 95.4% in 2009. However, the occupancy rate surged past 2008 levels by 2013. Those same studies showed that rent levels were flat–with a one-year minor dip–before recovering.

Yet all recessions aren’t created equal.

Looking Ahead

The National Association of Homebuilders in January forecast that single-family home production will fall to 744,000 units this year before rebounding to an annual pace of close to 1 million homes per year in 2024. Higher interest rates are a factor in the current decrease, although the pace of Fed interest rate increases cooled in early 2023 when the Fed boosted its benchmark interest rate by only 0.25%.

Should the longer-term trend of about 1 million new single-family homes continue–combined with multifamily starts, which CoStar estimates will be between 400,000 and 500,000 this year before declining to an average of about 300,000 starts per year through 2027–the result would be 1.3 million to 1.5 million housing starts per year for the next five years.

Meanwhile, the Urban Institute projects 8.5 million households being added this decade, an average of less than 1 million per year. Even if that figure is low and the number of housing starts is high, forecasts indicate that there will be more new homes than new households over the next few years.

Additionally, CoStar projects that employment in the United States will grow by only 0.4% annually over the next five years, significantly below the current rate of 3.0%. Median household income is projected to continue to increase at recent rates, approaching $85,000 by 2027 (it was just over $70,000 in 2021, the most recent year for which the Census Bureau has published figures). Novogradac estimates that the national median income will increase by 6.9% in 2023 and 3.4% in 2024, which is in line with the CoStar estimates.

That creates a combination of housing production outpacing the rate of household growth, a relatively flat jobs market and modest income growth. This trend isn’t unnoticed.

In its February 2023 national rent report, Apartment List wrote that 2023, “could be the first time in years that we see property owners competing for renters, rather than the other way around.”

Jay Lybik, CoStar Group’s national director of multifamily analytics, said in a press release, “With 2023’s national forecast predicting the highest new supply totals since the 1980s, expect vacancy to rise above 7% and rent growth to push much lower.”

For LIHTC-financed properties, the expectations are a bit different. Novogradac partner Thomas Stagg’s research indicates that allowable LIHTC rents for 2023 (expected to be released in mid-May) are expected to increase by an average of 8% in areas Novogradac can estimate. (A reminder: Many properties operate below their maximum allowable rents, as owners regulate allowable rent increases based on their tenants.)

LIHTC properties appear well-situated for the market conditions, given their rent levels compared to market rates. Even in a recession with the expected imbalance between housing production and household formations, LIHTC properties in the aggregate should perform well. 

That said, individual results can differ, and there will be heightened attention on markets studies and anticipated rent growth. For additional analysis regarding local market conditions and allowable rent growth, please reach out to Novogradac.