The latest numbers from Freddie Mac estimate a shortage of 3.8 million housing units as of Q4 2020. Freddie Mac says these units are needed not only to meet the demand from a growing number of households but also to maintain a target vacancy rate of 13%.
That number may be even worse, as the pandemic has shifted where people work and live. The shortage crisis may even be one reason why housing prices just won’t go down. Construction companies haven’t been able to build fast enough to meet demand.
Coupled with skyrocketing interest rates and labor shortages, it’s been a hectic year for real estate. But one area that could help close that gap is the multifamily market.
According to a report from research firm Construction Coverage, permits for multifamily homes have picked up recently, with a higher share of permits approved in urban areas. The number of units authorized has jumped in the past few years, reaching 689,500 in 2022, while at the same time, the number of authorized single-family units declined for the first time since 2011.
While multifamily homes only account for 28% of the housing stock nationally, that number could increase in the next few years. Thanks to several states ending single-family zoning laws, multifamily homes are becoming more popular.
Markets With the Most Construction in Coming Years
The increase in multifamily homes isn’t the same across the country. Some areas have more than others. The New York-Newark-Jersey City region, for example, leads with over 46,000 authorized units. It also has a strong share of multifamily units—around 79% of new units in the market authorized are multifamily homes, while they currently make up 57% of the current share of housing units.
Other areas that already have a large level of multifamily housing, such as Massachusetts and New Jersey, have seen an uptick in recent years. But there’s also been an unexpected rise in authorizations in areas that historically have had fewer multifamily homes—namely, the Midwest and West, in states like South Dakota, Washington, Minnesota, Nebraska, Colorado, and Montana, where authorizations now exceed the 50% mark.
Here’s a look at these markets.
| Large Metro Areas With Largest Percentage of Multifamily Authorization | Share of New Multifamily Housing Units Authorized | Share of Existing Multifamily Units | Total New Multifamily Housing Units Authorized |
|---|---|---|---|
| New York-Newark-Jersey City, NY, NJ, PA | 79.30% | 57.40% | 46,323 |
| Seattle-Tacoma-Bellevue, WA | 73.60% | 36.90% | 19,632 |
| Boston-Cambridge-Newton, MA-NH | 72.40% | 46.70% | 10,469 |
| San Francisco-Oakland-Berkeley, CA | 69.90% | 41.00% | 7,834 |
| Hartford-East Hartford-Middletown, CT | 66.90% | 35.50% | 1,283 |
| Los Angeles-Long Beach-Anaheim, CA | 65.60% | 42.80% | 21,326 |
| Miami-For Lauderdale-Pompano Beach, FL | 65.20% | 48.40% | 13,051 |
| Washington-Arlington-Alexandria, DC, VA, MD, WV | 64.00% | 35.40% | 20,736 |
| San Diego-Chula Visa-Carlsbad, CA | 62.40% | 37.70% | 5,829 |
| Minneapolis-St. Paul-Bloomington, MN, WI | 61.60% | 28.90% | 14,611 |
Markets With the Least Construction in Coming Years
At the same time, some areas will have fewer multifamily units authorized over the coming years. In general, the South tends to have less multifamily units, although there are exceptions in some urban areas of Florida, Texas, and Georgia.
| Large Metro Areas With Lowest Percentage of Multifamily Authorization | Share of New Multifamily Housing Units Authorized | Share of Existing Multifamily Units | Total New Multifamily Housing Units Authorized |
|---|---|---|---|
| Oklahoma City, OK | 13.60% | 22.00% | 940 |
| Memphis, TN-MS-AR | 19.00% | 23.90% | 816 |
| Fresno, CA | 19.60% | 26.30% | 718 |
| Cleveland-Elyria, OH | 22% | 27.80% | 820 |
| Buffalo-Cheektowaga, NY | 23.70% | 35.10% | 378 |
| Sacramento-Roseville-Folsom, CA | 24.40% | 23.80% | 2,630 |
| Tulsa, OK | 25.00% | 22.00% | 1,280 |
| Riverside-San Bernardino-Ontario, CA | 25.60% | 19.50% | 4,280 |
| New Orleans-Metairie, LA | 25.60% | 30.00% | 1,065 |
| Providence-Warwick, RI, MA | 26.5% | 39.90% | 563 |
A New Opportunity for Investors?
This shift in multifamily housing units is huge. Multifamily homes account for 41.4% of new housing, the highest since 1985, according to data from Construction Coverage. Multifamily homes are not only cheaper for homebuyers, they are also a popular rental investment. Rental prices overall in the U.S. are still strong, making multifamily homes an appealing investment for would-be landlords.
Current market conditions favor multifamily investing. Although current mortgage rates have dipped slightly in recent weeks, they remain near a two-decade high. With multifamily homes selling for less than nearby single-family homes, it’s cheaper to buy these properties. And with more supply in the pipeline, it’s possible they could get even cheaper.
Of course, demand is likely to only keep up as long as the job market stays strong. With growing signs that the labor market is cooling, demand for housing (and pricing) could cool as well.
The Bottom Line
States across the U.S. are doing what they can to address the housing shortage, including making it easier to build multifamily homes. An increase in multifamily construction means more supply and an opportunity for investors to buy (and possibly rent out) multifamily properties. In a few years, the housing shortage may be solved as the single-family home with a white picket fence becomes the duplex.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
