Large, boxy apartment buildings are proliferating faster than ever

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Amidst the material shortages, price hikes, and other housing market craziness over the past year, something remarkable happened. US builders were completing more apartments in large apartment buildings than ever before.

Yes, these numbers only go back to 1972, but with other statistics indicating that 1972-1974 marked the all-time peak in all US housing construction, it is safe to say that the 214,000 completed housing units in buildings with 50 units or more in 2021 has never been surpassed.

The news, included in annual data on new housing characteristics that the Census Bureau released with little fanfare earlier this month, could come in the face of a pandemic that has emptied downtown office blocks and led to bidding wars for real estate in the outer suburbs and mountain resorts led to be a surprise . Large apartment buildings don’t really seem to fit in at the moment.

One explanation for their continued boom is that large apartment buildings due for completion in 2021 generally had to have been under construction before the pandemic hit. According to the Census Bureau’s Survey of Construction, the average time from permit to completion for multifamily buildings with 20 units or more that were completed in 2021 was about 19 months.

But that doesn’t explain what’s next: after a 2020 dip, the number of new multifamily unit registrations picked up, and over the trailing 12 months was 37% higher than the same period in 2018/2019.

Home completions are now slightly down, suggesting 2020 may allow for a slowdown, but that should reverse soon. We don’t know exactly how many of these new homes will be in large buildings because permitting statistics don’t differentiate between 5-unit homes and 50-unit homes. But over the past five years, dwellings in buildings with 50 or more units accounted for 57% of all completed multifamily homes, while dwellings in buildings with 20 or more units accounted for 85%.

During the housing boom of the 1970s and 1980s, smaller buildings predominated. Today, few apartment buildings with four units or fewer are being built — the Census Bureau estimates that in 2021 only 4,000 maisonette units and 3,000 units in buildings with three or four units would be completed — and those in the five- to 19-unit blocks series has evolved from being the mainstay of the supply of new homes in the US to being an afterthought.

The disappearance of this “missing middle” between single-family houses and larger apartment buildings was widely lamented and, as can be seen from the graphic above, could not be fully compensated for by the boom in large apartment buildings. Nonetheless, housing construction is now at levels not seen since the 1986 Tax Reform Act eliminated key tax incentives for investment in rental housing. In contrast, overall residential construction – which consists mostly of single-family houses – is only about two-thirds of its 2006 peak.

A longer, population-adjusted look shows that the period from 2008 to 2015 was the weakest for US housing starts since World War II and one of the weakest on record.

This housing crisis happened just as members of America’s largest generation, the Millennials, were entering adulthood. Not a good time! So the current housing boom is taking place in the context of a growing supply of housing, but not fast enough to meet the demand that has built up during this crisis. And now it has taken on new forms with the introduction of remote working in the pandemic era.

The ability to move away from downtown offices and even major metropolitan areas has to some extent shifted demand away from expensive neighborhoods and coastal metros in general. But quaint mountain towns can only accommodate a limited number of newcomers, and major inland and coastal metropolitan areas are surfacing physical and political barriers to the construction of many more single-family homes. It’s no surprise that apartment buildings make up the majority of new housing being built in and around New York, Philadelphia, Seattle, Miami and Boston, but it’s a bit surprising to see that the same is now happening for Austin’s subways , Denver and Twin Cities areas, with Nashville not far away.

Other, smaller metropolitan areas where the majority of new housing units approved in 2021 were in buildings of five units or more were Napa, California (86.3%), Missoula, Montana (73.2%), Santa Fe, New Mexico (72.9%). ; Madison, Wisconsin (72.8%); Boulder, Colorado (62.4%); and Rapid City, South Dakota (53.6%). It’s clearly not just a big city thing. And while residential buildings with more than 50 units in these locations are likely to make up a smaller portion of the mix than in larger metropolitan areas, the trend toward size has been fairly universal. Another way to measure this is by the height of the buildings.

Most of these buildings are probably not much higher than four stories. According to data from Characteristics of New Housing, 77% of apartment buildings completed in 2021 were timber frame buildings. While “bulk timber” buildings up to 18 stories are now allowed, “stick” frames, similar to single-family homes, are the standard in U.S. timber-frame residential construction and are subject to stricter height restrictions. The resulting proliferation of boxy, five-over-one, five-story timber-frame dwellings over a concrete ground floor (or, if you prefer, Type V construction over Type I) is something I’ve written about extensively of the past and won’t elaborate on them here except to urge you to call them “Stumpies” because I think that’s a good name.

But why the move from small apartment buildings to large ones? I don’t think consumer demand really explains it. Yes, a large building or complex can offer amenities like pools, gyms, and concierges — not to mention views, if it’s big enough — that a smaller one can’t, and there seems to have been an increase in the number of affluent renters, many of them empty nests demanding such amenities. However, supply-side factors appear to be more important.

Housing is more difficult to build than it used to be, partly because there is not much buildable land left in major metropolitan areas (or even adjacent in some coastal metropolitan areas) and partly because political and regulatory barriers to development have grown. This favors developers with lots of resources and expertise. Across industries, multifamily development isn’t all that concentrated — the top 25 US developers accounted for a quarter of multifamily housing starts in 2021, according to the National Multifamily Housing Council rankings. But even developers well below the top 25 are becoming increasingly professionalized and institutionalized through their work, involving syndicators, real estate investment trusts, and even sovereign wealth funds. Building a couple of semi-detached houses on a vacant lot in a residential area isn’t really worth these people’s time. Building a 150-unit apartment building in a city or suburban shopping area often is.

Will it continue? According to the National Council of Real Estate Investment Fiduciaries, the annualized return on US housing investments over the past decade was 9.2%, with a 24.1% return for the four quarters ended March. Rising interest rates and a slowing economy mean 2022 and 2023 won’t be nearly as lucrative — the Standard & Poor’s 500 Residential REITs Sub Industry Index is down 36% since April — and a construction slowdown will almost certainly follow. But the longer-term forces driving large-home investment don’t seem to be going away.

More from other authors at Bloomberg Opinion:

Cooling housing market will lead to more dysfunction: Conor Sen

Housing defies the Fed’s campaign to curb inflation: Jonathan Levin

Real Estate Bubble Fears and Your Down Payment: Alexis Leondis

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Justin Fox is a Bloomberg Opinion columnist covering companies. A former executive editor of Harvard Business Review, he has written for Time, Fortune, and American Banker. He is the author of The Myth of the Rational Market.

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