Despite investor interest, commercial construction companies still cautious

The multifamily sector has reliable demand with consistent returns making it a solid investment for real estate investors.

The multifamily sector is still producing lucrative gains for investors even though multifamily construction starts declined in recent months as a result of commercial real estate companies' careful expansions.

The National Association of Home Builders reported data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development that revealed a 9.9 percent decrease in housing starts nationwide in June – settling at a seasonally adjusted annual rate of 836,000 units – a dip that can be attributed to a slow down in multifamily construction. 

"The large dip in multifamily production in June follows a boost of activity in May, and is consistent with the volatility that has come to characterize that sector as well as the uneven pace of the housing recovery," noted NAHB Chief Economist David Crowe. "That said, the fact that single-family starts and permits both rose in three out of four regions in June is a positive sign that's in keeping with our forecast as well as recent surveys in which single-family builders have registered an increasingly positive outlook."

May experienced a 28.2 percent increase in multifamily production activity only to backtrack in June with a 26.2 percent decrease in activity. Single-family housing starts remained relatively unchanged, seeing a modest decline of 0.8 percent in June. Meanwhile, building permits in the multifamily sector declined by 21.4 percent, entirely contributing to a fall of 7.5 percent in general building permit activity. There was a 0.6 percent gain in single-family building permits, a good barometer of future activity. 

"While demand for new homes and apartments has grown considerably over the past year, builders are still being very careful not to get ahead of the market, and today's report reflects that cautious approach," said Rick Judson, Chairman of NAHB. 

Constrained supply translates to rent appreciation
The slow-and-steady nature of the multifamily sector, despite shrinking construction activity, is attractive to investors. An apartment building is perceived as a safe investment. The constrained pipeline of new buildings could be a factor in rising rents in low-vacancy rate regions such as New Jersey. 

According to The Star-Ledger, vacancy rates are 2.8 percent – well below the national average of 6 percent. Such a low-vacancy rate indicates a significant demand for rental units giving commercial property managers the leverage to raise rents each year.

"Coming out of the recession, investors who were burned in the past were looking for safety," said Jose Cruz, senior managing director at HFF. "Office [real estate] was reeling, retail was still trying to get its footing. Multifamily is a very safe investment and returns are very good."

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