3. Constrained Supply – It is estimated that construction of 4.6 million multifamily units will be needed by 2030 to keep pace with demand.
Meeting the demand is being hampered by factors such as onerous government regulations, increasing construction-related costs, rent control, and concentration of new supply.
• According to a research study conducted by the National Multifamily Housing Council and the National Association of Home Builders, an average of 32% of multifamily development costs were due to regulations imposed by all levels of government. While some amount of regulation is necessary, government agencies should consider the impacts of their actions. The regulation related component of the total cost of multifamily development projects is a sizeable hurdle to development and, particularly, with regard to housing units for families with modest incomes.
• Multifamily housing development is increasingly expensive due to the costs of vacant commercial land and construction (labor, materials, and contractor fees), according to the Joint Center for Housing Studies of Harvard University. Between 2012 and 2017, the inflation rate was only 7%, but land and construction-related costs increased by 62% and 25%, respectively. According to the Harvard report, “The lack of new, more affordable rentals is in part a consequence of sharply rising construction costs, including labor and materials.”
• In 2019, California, Oregon, and New York passed rent control laws with the most stringent taking place in New York. Since 2017, more than a dozen other states have either considered legislation and/or ballot initiatives to limit rent growth. Based on these developments, the continued push for more rent control is likely. Unfortunately, these laws disincentivize continued development of new units and investment in existing units.
• 2018 Fact Sheet from the National Multifamily Housing Council and National Apartment Association, one factor that hampers supply is the loss of up to 125,000 multifamily units every year due to destruction, demolition, and deterioration. Also, the loss of multifamily units tends to be concentrated in lower-end workforce housing, which has been decreasing in supply.
• Construction of new units has concentrated geographically and/or mainly in higher-end Class “A” properties. According to the March 2017 report by Fannie Mae, approximately 25% of multifamily construction occurred in five cities: Boston, Los Angeles, New York, San Francisco, and Washington D.C. Developers will construct based on the project’s (investment) yield, and this does not necessarily correspond to what unit type is most needed. The construction of mid to lower-end multifamily units is financially challenging or nonviable in high-cost markets/areas as these same areas would highly favor the development of higher-end units.