Multifamily housing starts expected to decline slightly in 2004.

The forecast calls for multifamily starts to total 323,000 units in 2004 and 328,000 units in 2005. Multifamily starts totaled an estimated 344,000 units in 2003. Last year, multifamily starts were down less than 1 percent from the 347,000 units for 2002.

Multifamily construction starts should moderate this year and then increase slightly in 2005. The forecast calls for multifamily starts to total 323,000 units in 2004 and 328,000 units in 2005. Multifamily starts totaled an estimated 344,000 units in 2003. Last year, multifamily starts were down less than 1 percent from the 347,000 units for 2002. The 2002 starts level was the highest since 1989.

Rental Housing Construction

Some adjustment is underway in multifamily construction and more is expected this year. Multifamily rental construction fell an estimated 5 percent last year as a result of a high vacancy rate for apartments, low interest rates for home mortgages and a weak labor market.

The estimated 256,000 units started last year dropped from the 270,000 units started in 2002. A second straight year of a 5 percent drop can be expected in 2004 followed by the beginning of a recovery, in 2005. About 242,000 rental apartment unit starts are predicted for 2004 and 244,000 units are anticipated for 2005, representing almost no change from last year.

During third quarter 2003, the rental apartment vacancy rate (as measured by the U.S. Department of Commerce) rose to 11.5 percent, its highest since 1988. Reis's average apartment vacancy rate in the many metropolitan areas it measures has risen to about 6.8 percent in the third quarter from less than 3 percent in 2000. Most important in the rise in the rental apartment vacancy rate is the weak labor market. Employment in October was down by more than 2.4 million jobs from the peak established in February 2001. The October level, however, may represent the beginning of a turnaround in employment trends, it was up 126,000 jobs from September.

Demand for rental apartments also has eased because mortgage interest rates fell to more than 40-year lows in summer 2003 and remain close to that rate at the start of 2004. And, they have been trending down for several years as a result of an accommodative monetary policy and low inflation. Homeownership rates rose to record levels and the renter shares of total households dropped to less than 32 percent in the second half.

An easing in the rental apartment market is also observed in the decline in the absorption rates of new rental apartments. An estimated 188,900 unfurnished new rental apartment units were absorbed last year, this was up from the 179,400 in 2002, but less than the recent peak of 225,900 new units leased in 2000.

Rents increased about 2.4 percent last year--the lowest rate of increase since 1986. Morn important is that rents rose above inflation for the eighth consecutive year. Rent increases should moderate slightly this year to 2.1 percent--as a result of increased unemployment--and then rise to 2.6 percent in 2005.

It is reasonable to expect that apartment starts would decline more significantly than they have with the higher vacancy rates. One factor in the modest constriction of rental apartment starts is the several-quarter lag between changes in market conditions and new construction. Another is the large amount of low-cost financing that has been available to the rental apartment market. Healthy rent increases until this year have also encouraged new development.

Construction of multifamily rental units should decline iii all regions of the country this year. The Northeast and Midwest should experience the largest declines. The South most likely will experience the smallest decline.

The easing of the pressure on the rental market from demographics is underway. Demographic trends that limit demand for rental housing are in the early stage of turning around to become more favorable for the industry. There were about 2.75 million more persons aged 18 to 24 years in 2002 than there were in 1995. These are the Echo Boomers--children of the post World War II Baby Boomer generation. Many of these persons have or will form a new household during the next several years and most will be renters. About 77 percent of households younger than 25 years of age are renters.

For-Sale Multifamily Units

For-sale multifamily unit demand strengthened during the past four years, but some adjustment can be expected this year. An estimated 88,000 for-sale multifamily units were started in 2003, up 14 percent from the 77,000 units for 2002. The forecast calls for multifamily for-sale unit starts to drop to 81,000 units in 2004 and then rise to 84,000 units 2005.

About two-thirds of the multifamily units started are condominium and cooperative apartments in structures with five or more units. The Commerce Department has stopped detailing the multifamily completions and their characteristics into 2-4 unit and 5-or-more unit structures.

Most of the rise in multifamily for-sale unit starts last year appears to be in condominium and cooperative apartments. There is data for starts of units in structures in the 2-4 unit and 5-or-more unit categories. Starts of units in structures with 2-4 units declined 18 percent during the first three quarters of 2003.

Support for the strengthening of condo and co-op markets comes from the sales of existing units. Sales of existing condos and co-ops jumped 12.9 percent to a seasonally adjusted annual rate of 971,000 units in third quarter 2003, up from the previous record of 860,000 in the second quarter.

Three major factors support the strengthening of the condo and co-op apartment markets: price appreciation, low mortgage interest rates and federal tax pop icy. Price appreciation has been significant during the past three years. Median condo and co-op resale prices rose 11 percent in 2001 to $123,200 and 15 percent in 2002 to $142,200. They jumped 17 percent during the first nine months of last year to $167,200 from the same period in 2002.

Demand for condo and co-op apartments appears to have been helped by the changes in the treatment of capital gains in the sale of residences passed by Congress in 1997. More empty nesters are turning to them given that they are able to trade down from a detached unit without facing capital gains taxes. More favorable capital gains tax policy in the sale of homes should spur more demand for condos and co-ops as this decade proceeds and the leading edge of the post World War II Baby Boomers continue to move toward being empty nesters and retirees. This year, however, a modest adjustment in multifamily demand will occur as a result of increases in mortgage interest rates.

SELECTED RENTAL HOUSING MARKET VARIABLES FORECAST

                                        1999       2000       2001

Median Rent New Units                   $817       $841       $870
Median Asking Rent Existing Units       $460       $480       $508
Rental Apartment
Vacancy Rates 4th Qtr.                  8.7%       8.9%      10.0%
% Change CPI (1)                        2.2%       3.4%       1.1%
% Change CPI Rent Index (1)             2.8%       3.6%       4.7%
Unfurnished Nonsubsidized Apartment Units
Completed                            225,900    226,000    192,300
Absorbed                             209,000    225,900    178,000
Absorptions Rates New Units (2)
 3 months                                72%        72%        72%
 6 months                                89%        89%        87%
 9 months                                95%        95%        84%
12 months                                98%        98%        97%
Renters Share of Total Households
Fourth Quarter Each Year               33.1%      32.5%      32.0%

                                        2002       2003       2004

Median Rent New Units                   $910       $926       $965
Median Asking Rent Existing Units       $530       $543       $560
Rental Apartment
Vacancy Rates 4th Qtr.                 10.5%      11.6%      10.9%
% Change CPI (1)                        1.5%       2.1%       2.3%
% Change CPI Rent Index (1)             3.1%       2.4%       2.1%
Unfurnished Nonsubsidized Apartment Units
Completed                            204,300    196,500    189,500
Absorbed                             179,400    188,900    181,400
Absorptions Rates New Units (2)
 3 months                                64%        57%        61%
 6 months                                82%        73%        78%
 9 months                                91%        87%        89%
12 months                                95%        92%        92%
Renters Share of Total Households
Fourth Quarter Each Year               32.2%      31.8%      31.7%

                                        2005

Median Rent New Units                   $992
Median Asking Rent Existing Units       $576
Rental Apartment
Vacancy Rates 4th Qtr.                 10.4%
% Change CPI (1)                        3.4%
% Change CPI Rent Index (1)             2.6%
Unfurnished Nonsubsidized Apartment Units
Completed                            179,600
Absorbed                             172,500
Absorptions Rates New Units (2)
 3 months                                70%
 6 months                                84%
 9 months                                92%
12 months                                94%
Renters Share of Total Households
Fourth Quarter Each Year               31.7%

(1) December to December

(2) After completion for units completed previuos year

Source: U.S. Departments of Commerce and Labor, Federal Reserve Board
Forecasts by Regis J Sheehan & Associates

Robert J. Sheehan is President of Regis J. Sheehan Management and Economic Consultants in McLean, Va., and serves as NAA's Consulting Economist. He can be reached at 703/893-9185.