Multifamily Construction Starts and Household Formation

Household formation drives demand in multifamily construction.  As we see household formation accumulate to measurable numbers we will also see increasing construction starts.  And this time, with a much sharper pencil with limited tertiary construction with a hope and prayer that "they will come".  

As job creation returns more adults will choose to leave living arrangements with family members caused by recessionary pressures.  This increase in household formation will place added pressure on multifamily demand. As the rate of household formation increases, concurrent with years of low multifamily construction starts, vacancy will decrease and rent growth will escalate.

An on-going misnomer is that "shadow inventory" is dampening demand for apartment rentals- not true.  Of the potential ten million single-family homes representing this supposed shadow inventory- six million are in various stages of foreclosure. Translation; un-available for rental.

These foreclosures will eventually clear.  Regardless, housing construction starts (single-family and multifamily) remain well below future demand that will occur from:

·    Continued increases in population

·    In-migration into the United States,

·    Decreases in average family size

·    The reversal of families doubling-up (new household formation)

Here is a reasonable definition from a report issued by   entitled "What Happens to Household Formation in a Recession?" by Gary Painter of USC. 

 "New households can be formed either when children move out of their parents’ homes, when couples separate or when unrelated individuals choose to live singly after previously sharing a residence"

Population keeps popping, albeit at a drip pace, but still increasing.  And with recent job creation ticking  up  "Junior" and his bride-to-be are finding opportunities to move from the nest and form their own household.  Mom is happy.  Junior is happy.

We will see more infill construction, close in suburbs, new single-family and multifamily housing attached at the fencepost to rail, light rail and rapid transit systems.  As Professor Shiller is apt to say "x-urbs" may well be behind us. 

Jobs are key and jobs are first created in urban areas where synergies exists.  Waiters and welders both work in cities- in urban environments, and expand from these dense places to suburbs, x-urbs and beyond.  Our densely populated cities will become denser with people tepidly leaving the "safety in numbers" for suburban environs.  

If you wonder about how the gainfully employed feel about leaving a finally found job, ask anyone unemployed for twelve or more consecutive months.  I submit that their commute is shorter than ever before as they identify housing within a stone's throw of their job. Yes, increases in household formation will create demand  for multifamily- but close to job centers first and foremost.    

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