The Multifamily Housing Conundrum

October 24, 2024

One puzzling aspect of the recent surge of apartment construction starts is why it's taking so long for some of those units to come on the market and help put downward pressure on rental costs.

Rising rents and house prices have been a challenge since at least the beginning of the COVID pandemic and the primary driver of inflation for the past two years. Typically, elevated prices induce new supply that eventually lowers prices. The market did respond in that fashion in 2022, which had the highest number of multifamily-construction starts since the Great Recession (2007-09). However, while some of the new units have been completed or are in the pipeline, the question remains: why does it seem to take so long to build apartments and condos in the United States?

This situation drew the attention of Chris Cunningham, an Atlanta Fed research economist and associate policy adviser, and Anthony W. Orlando, an associate professor of finance, real estate, and law at California State Polytechnic University, Pomona, and Atlanta Fed visiting scholar. Their Policy Hub paper, "How Long Does It Take to Build Multifamily Housing?" examines reasons for, and potential solutions to, one of the paper's findings: "There appears to be a long-term upward trend in the time to deliver multifamily housing."

The authors reasoned the market could have been expected to hasten the rate of construction when rental prices nationwide rose nearly 21 percent over the past five years, according to a September report by Harvard's Joint Center for Housing Studies. The increases have resulted in the cost of shelter being one of the larger and more persistent sources of inflation and made housing costs a central policy concern at the local, state, and federal levels, says Cunningham. The Federal Reserve uses housing costs, which are included in the personal consumption expenditures, as a metric in decisions about monetary policy.

"For example, shelter accounted for 90 percent of month-over-month inflation in the July CPI," Cunningham said. "Part of the motivation for the paper was just to document variation in development duration over time, across regions and project size. If it's taking longer to bring a multifamily unit to market, for whatever reason, could that explain why there has been less supply response than might be warranted by the recent surge in rents?"

Estimates of the national housing stock deficit range from 1.5 million to 5.5 million, depending on the method of calculation, according to a January report by Harvard's Joint Center. If affordability is added as a factor, the national housing shortage could reach an estimated 7.3 million. Cunningham observed that the portion of this demand in metro regions could be more easily met by adding multifamily structures in urban cores than by developing single-family houses far from existing centers of jobs, shopping, and infrastructure.

The paper begins: "Increasing the supply of multifamily housing is a key strategy to reduce the cost of shelter in our larger cities." The research model is based on one used in a 2016 study that examined the amount of time taken to plan and build structures. The goal of the paper was to uncover any possible bottlenecks that are impeding development of multifamily structures over time, and across regions and project size, Cunningham said.

Cunningham and Orlando tracked variables in the development process such as the length of time from inception to completion, building size, public versus private projects, conversions versus new construction, and multifamily-only versus mixed use. These are all factors in the developers' decision-making about whether to bring a project to market.

The authors establish several facts about the timing of multifamily-housing development during the past two decades. Then the paper outlines three ideas that policymakers might consider to shorten construction timelines:

• "Streamlining the permitting and entitlements process can be very valuable. This streamlining can take the form of both regulatory changes and personnel enhancements."
• "Conversions [commercial to residential] are not a panacea…. Most conversions are complicated and introduce new challenges that outweigh any timing advantages of ground-up construction."
• "Zoning requirements that mandate ground floor retail may be slowing the multifamily projects."

Two residential developers in our District, one in Georgia and one in Florida, offered their views on Cunningham and Orlando's conclusions.

In Atlanta, John O'Callaghan, president and chief executive officer of the nonprofit Atlanta Neighborhood Development Partnership, said the entitlement and permitting processes among various local governments are lengthy. Citizen input, which he values, adds steps to the process. The effects of the pandemic linger: "The regulatory process was slowed during the pandemic and has not fully recovered because of backlog and the volume of requests."

Near Melbourne, Florida, Todd Pokrywa, president of The Viera Company, said shortages and rising costs of labor and materials are the cause of construction delays in Viera's planned communities. He said Brevard County has streamlined the process for residential development. This year, the Florida legislature enacted two measures intended to expedite the approval process of residential building permits. Still, the heated market strains Viera's capacity: "We can't get lots in the ground fast enough to meet the demand, but we are simultaneously focused on improving quality and customer satisfaction."

Since October 2022, senior lending officers have been reporting "tighter standards and weaker demand for all commercial real estate loan categories," according to the Fed's periodic survey of senior loan officers. Cunningham said he's concerned that as development timelines grow ever longer, investment decisions will become less sensitive to the short-term rates the Fed can influence.

Regarding rental housing affordability, which is influenced by the relative scarcity of available dwellings, the Atlanta Fed's recently updated Southeastern Rental Affordability Tracker shows a total of 41 percent of renter households pay at least 30 percent of their income on rent and utilities. Of this group, about half pay 50 percent or more of their income on rent and utilities. The tracker includes Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee.

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