To explore this some more, I've created a rather crude multiple regression model to help us guess about how much of 2013 permit activity will be multifamily activity.
The graph is explained by this equation spelled out without the Greek letters for non-economists:
Multifam ratio = -2.8 - 0.03(unemployment rate) - 0.27(home price index) +0.28(residents age 20-35)
The first thing that strikes us about this model is that it has become less predictive over the past decade. We see that during the 1990's the models' predicted values were very close to the actual values. Since then, the model, while getting the general trends right, has tended to miss the big swings that have actually occurred. Some of this is likely due to the fact that employment has become less predictive of multifamily demand in recent years. Other possible problems stem from the fact that the condo/apartment mix changes over time.
Nevertheless, this model tells us, more or less, that home prices, the unemployment rate, and the number of people in the 20-35 age range are important factors in determining what proportion of new housing permits will be multifamily permits.
As home prices increase, builders respond with new single-family construction, so that pushes down the proportion of total units that are multifamily. As unemployment declines, the demand for apartments (and rental rates) goes up, pushing up the proportion of units that are multifamily. And not surprisingly, an increase in the number of younger people (age 20-35) produces more demand for building multifamily units as well.)
Using this model, if we assume that the unemployment rate comes down a little more while the home prices increase by 5 percent or so, and the number of people age 20-35 increases by another 1 percent, then the proportion of units that are multifamily will remain more or less the same at around 35 percent. Various scenarios involving a continuation of current economic trends (with some moderating of 2012 trends, which we expect) points toward little change (or a decline) in the proportion of units.
This is not surprising, since single-family home producers have just recently started to really ramp up home production, and as that occurs more in 2013, multifamily is likely to decline as a share of total permit activity.
Total Units Permitted
The second model, also a fairly simplistic multiple-regression model, is supposed to help us predict how many how many multifamily units will be permitted in each year. This is a better model than the first one we looked at. And here's the equation:
Total units permitted = -28.7 - 0.6(Unemployment rate) + 8.6(occupancy rate) + 62.6(rent per square foot) – 40.5(total units rented)
For example, if I assume that the unemployment rate drops to 7.5 percent for the year (2013), and that the vacancy rate holds steady (it's unlikely to fall much below 4.3 percent), and we factor in the new units that have been produced, the model predicts a decline in total units, year over year.
The industry is moving fast to add a lot of units in 2013, but as this model shows, it's going to be difficult to produce economic conditions that can tolerate a large amount of growth in units -above 2012's growth rate- while still allowing for ongoing increases in rents and stable vacancies. There are a historically large number of units set for delivery in 2013, and many of those were permitted in 2012. 2,000 new units were actually completed and opened to the marketplace in metro Denver alone during 2012. With another 6,000 or so planned for the region in 2013. That's going to put some downward pressure on rents and upward pressure on vacancies. The model predicts 6,400 new MF permits for 2013, which is a decline from 2012, but still a sizable number.The actual number will likely be higher than the predicted number, but the actual number will also likely be down from 2012's actual total.
9,800 multifamily units were permitted statewide in 2012 (a 150 percent increase over 2011). If total permits in 2013 were 6,400, that would still be an almost 50 percent above 2011's total.
Disclaimer: This article is for research and discussion purposes only. These models and this article are not intended as, and should not be treated as, investment advice.