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Rental starts poised to grow as condo market eases.

Multifamily housing starts rates were on a roller coaster from the spring of 2005 through the spring of this year. They jumped up one month and fell significantly the next month, but the overall trend was relatively flat at a 345,000-unit annual rate. And starts have been flat for the past three years in a 345,000- to 350,000-unit range.

Data support the proposition that increased condo and co-op construction were offsetting the relatively weak new rental unit activity until this year. Multifamily rental starts did peak in fourth quarter 2003. They then trended downward through the first quarter of this year. Multifamily rental starts peaked at 74,000 units and dropped to a low of 42,000 in the first quarter. Preliminary data for the second quarter showed an increase to 45,000 units. Because the data series is not seasonally adjusted, it is too early to tell if the second quarter represents a beginning of a rising trend in multifamily rental starts.

Multifamily condo and co-op starts had reached a record peak of 206,000 in 1983 near the apex of the Baby Boomers' entry into the housing market. Those totals then dropped markedly until a trough of 41,000 units was reached in 1991, when Baby Boomers were buying single-family homes.

As the 1990s progressed, Baby Boomers began to age into the empty-nester age groups, and condos and co-ops became more attractive to them. Condo and co-op construction starts rose moderately and reached 51,000 units by 1995. They might have risen faster, but capital gains tax policy made homeowners with large increases in values of their homes reluctant to trade down to a lower-priced unit or rental unit. This policy changed when the 1997 Tax Act opened the option of trading down without tax consequences to many homeowners.


The tax law change enabled condo and co-op starts to rise to 75,000 units by 2000 and to 87,000 units by 2003. Very low mortgage interest rates helped to push condo and co-op starts to 120,000 units in 2004 and to 150,000 units by 2005.

Condo and co-op starts did not moderate in the first quarter of this year, but they will as we move toward and through 2007. The inventories of unsold new and existing condos and co-ops have risen sharply and will deter new construction. Some new multifamily construction originally intended to be condos or co-ops will be changed to rentals. Rental construction will also be encouraged by improving demographic demand from the growth in young households born during the Echo Baby Boom.

Robert J. Sheehan is NAA's Consulting Economist. He can be reached at 703/491-7377 or
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Title Annotation:INDUSTRY TRENDS
Author:Sheehan, Robert J.
Date:Nov 1, 2006
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