U.S. housing starts beat expectations last month. Is that a good or bad sign for your real estate market?
Fox News proclaims the new surge in housing starts, fueled by multifamily building trends, is a strong sign that housing is improving. The success may be attributed to the soaring demand for rentals. Groundbreaking on new starts rose 6.5 percent in September 2015, making it the six month in a row we’ve seen more than one million units being started.
Is this new surge good or bad news for property investors?
New construction is great for the economy. Making up around three percent of the national gross domestic product (GDP), housing should help pull the rest of the economy up. Even though rental units are often the first units to be completed in fast growing areas, some may argue a surge in multifamily building could be a sign that individuals and families just aren’t buying. That may not be such great news.
However, it is important for those watching the real estate market to check longer term trends. New construction has generally lagged far behind where it was in the early 2000s. Many areas, like South Florida, have seen rental property construction be neglected over the last decade, and well below where it should be to keep up with population growth. How this new inventory really impacts local real estate markets will greatly depend on whether they are sold off to individual owners, or are positioned as rental complexes.
The pros of new multifamily building
New construction creates jobs, and may bring in more cash to the local economy. Multifamily construction, in particular, may bring more long-term, sustainable jobs than building single-family homes. The addition of more rental units to the local real estate market has the potential to improve affordability for renters, thanks to the increase in inventory and options.
There is no denying that this is a great time to be a landlord, and both individual investors and bigger funds aren’t missing the opportunity to lock into low interest rates and high rents.
The cons of new multifamily building
New multifamily building designated for rent can keep for sale inventory levels tight. That keeps pushing up home, condo, and land prices due to fierce competition among homebuyers and real estate investors. The most prevalent drawback of a flood of new rental apartments for buy and hold real estate investors is the competition for tenants. More options and competition can deplete the power landlords command. However, this really depends on the positioning and niche that individual landlords hold. Not all tenants will be drawn to today’s institutionally run rental complexes.
The conversion question
Builders and building owners can always decide to opt for condo conversions, and sell units instead. The reverse can be true too. This can create mayhem for buyers, owners, and renters. However, the flexibility multifamily buildings provide can help local economies effectively navigate market changes, and prevent major negative fluctuations.
New pivots ahead
Real estate investors should anticipate some potential pivots in the data ahead. Fears of overbuilding are being circulated in South Florida, as thousands of new condo units get ready to hit the market over the next two years. In reality, new construction has been at dramatically lower levels than before. Builders say they are feeling a slowdown, and some are easing up on 50 percent deposit requirements. In areas like Miami, where foreign buyers still make up around 50 percent of all property sales, local experts warn that a strong dollar and weak overseas currencies are making it much more expensive for international buyers. This is perhaps less noticeable at the high end of the market, where U.S. property is still unbelievably cheap on the global map.
A drop in building permits in September 2015 also shows that builders appear to be intelligently pacing themselves for seasonal changes. Expect to see a dip in housing figures before an end of year spike. Rising construction costs, a lack of workers, and rising borrowing costs could reign in future construction too.
The biggest pivot will be if more renters finally seize on low interest rates and easing mortgage lending in-mass and choose to buy instead of paying ever rising rents.
New multifamily properties are coming to the market. Their ultimate impact is going to depend a lot on how they are used. In all cases, this can be good for local real estate investors. However, it can bring competition. Before buying into too much media hype, investors should make sure they educate themselves on historical data and graphs to really get the data in perspective.