Copyright© 2015 Fannie Mae 1

Multifamily Market Commentary – November 2015

The Supply Gap is Substantial for Lower Income Households

The demand for affordable rental housing continues to increase each year, yet the amount of new supply – especially in 

terms of multifamily units – remains out of balance. Affordable rental housing is not just a multifamily issue: It also 

encompasses single-family homes, two-to-four family homes, even seniors housing. In all of these cases, the gap in 

supply and demand continues to widen, due to a “perfect storm” of strong demographic trends, high construction costs, 

and an increase in renter household formations. 

Rental Demand is on the Rise

Although there are an estimated 43 million renters in the U.S. as of 2014, the majority – about 53 percent – rent one-tofour-unit family homes. This segment of renters has been increasing steadily since 2009, as seen in the chart below. 

Approximately 4.4 million single-family and multifamily renter households were created between 2009 and 2014, 

representing just over an 11 percent increase in the overall number of renter households in just five years. Yet, the 

majority of these renter household formations – 2.7 million – occurred in one-to-four-unit family housing, roughly double 

the amount of demand for multifamily housing. The substantial increase in rental demand for one-to-four-unit family 

rentals, most especially in single-family detached units, corresponds to the decrease in the homeownership rate, which 

continued at to a 48-year low of 63.7 percent on a seasonally adjusted basis as of the end of the third quarter 2015 –

approximately 5.5 percent lower than the rate at the beginning of 2004.

Demand for multifamily rental housing has also been robust, growing by an estimated 1.7 million households, which is

approximately 10 percent higher since 2009. Reasons for this surge include continued job growth, positive demographic 

trends with both younger and older aged cohorts moving into multifamily rental units, and the movement away from 

homeownership. As a result, demand has also been on the rise for unsubsidized affordable multifamily rental housing. 

Also known as conventional affordable multifamily, it is usually identified as consisting of class B- and class C-type units.
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Diminishing Affordable Multifamily Supply

A complex set of factors has limited the supply of affordable housing over the last decade. During the 2004 to 2007 

housing boom, a significant number of multifamily units were removed from rental stock and converted to condominiums. 

During the Great Recession, financing for construction and rehabilitation of older apartment stock became severely 

limited. As a result, both the amount of new multifamily rental supply and the rehabilitation of older existing stock was well 

below the historic average. Concurrently, as many as 120,000 units are estimated to be lost from the nation’s multifamily 

inventory annually, and these units tend to be of an older stock and are considered to consist of more affordable units.

Multifamily Inventory Share by Class Type

Source: Reis, based on multifamily sample tracked

 

Data from REIS, a third-party data vendor that surveys the multifamily market, provides indications to trends in stock for 

the more affordable multifamily segment of the market, identified as Class B/C. Since 2007, the number of Class B/C units 

has remained virtually unchanged at about 5.7 million units, even as the number of renter households has grown. Even 

more notable, as shown in the chart above, the end result is that the share of these more affordable Class B/C units has 

recently declined to 57 percent of an estimated 10.1 million units of professionally managed multifamily rental stock –

down from 65 percent at the end of 2000 – since most of the new supply coming online over the past few years is in the 

luxury class A segment.
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Diminishing Affordable Share of Supply + Strong Demand = High Rents

As shown in the chart above right, national 

estimated rent growth for class B and C 

multifamily rental units has been above 3.0 

percent for nearly two years. Indeed, it has 

been at more than 4.0 percent for over a 

year now, far outpacing the rent growth for 

higher-end class A multifamily rental units. 

As shown in the middle chart, vacancies in 

the conventional affordable multifamily rental 

segment have remained below 5.0 percent 

since June 2012 and are now approaching 

vacancy rate levels generally seen at 

subsidized multifamily properties. 

As of December 2014, vacancies of class B 

and C properties were estimated at 3.4 

percent, which was just 1.1 percent higher 

than those recorded at subsidized Low 

Income Housing Tax Credit (LIHTC) 

properties. Demand is strong, helping drive 

the steep increase in rents for class B and C 

units.

Rental Housing Cost Burden 

Worsening

The combination of lack of supply and 

increasing demand suggests a direct link in 

the widening disparity in severe housing cost 

burdens between owners and renters. A 

household with a severe housing cost burden 

is defined as one that pays more than 50 

percent of its gross income for rent and 

utilities. 

As shown in the chart lower right, as recently 

as in 2013, 25.0 percent of working renter 

households were severely cost-burdened 

compared to just 17.1 percent of working 

owner households. Further, the percentage of 

renters that are severely cost-burdened has 

remained fairly constant since 2009, while the 

percentage of working owners with severe 

housing cost burdens has declined by an 

estimated 4.1 percent. 

One of the after-effects of the Great Recession 

was slow job and wage growth. As a result, 

rent growth has outpaced growth in household 

income on an annual basis since the end of 

2009, thereby contributing to the plunge in 

housing affordability and the worsening of the 

housing cost burden for many renters.
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Significant Supply Gap

There is a significant supply gap in affordable rental housing resulting from demand far outstripping supply. The amount of 

the gap varies depending on a household’s relation to its Area Median Income (AMI). As shown in the chart below, nearly 

one out of every four renter households – an estimated 10.6 million – were considered to be extremely low income in 

2013, earning less than 30 percent of AMI for their locality. There were just 6 million rental units affordable to these 

households, resulting in an absolute shortage of 4.6 million units. For very low income households, classified as those 

earning between 31 percent and 50 percent of AMI, the situation is somewhat better. Despite these households earning 

more income, there is still a significant gap of 2.2 million rental units affordable to this AMI category of renter. 

As shown in the chart above, the number of high income renters – classified as those earning 120 percent or more of the 

AMI for their locality – has grown steadily since 2009. These households could afford to be homeowners but are choosing 

to rent. It is important to remember that these higher income renters – and indeed renters of any income category – are 

able to occupy housing stock affordable at lower AMI categories, rather than rent more expensive housing units. This 

mismatch worsens the supply gap for affordable rentals.

As seen in the adjacent chart, a sizable 

percentage of rental units affordable to 

extremely low income and very low 

income households are actually occupied 

by renter households earning more than 

the maximum income for each category. 

At 52 percent, only a slim majority of units 

affordable to extremely low income 

renters are actually occupied by extremely 

low income renter households. The 

remainder are occupied by households 

earning more than 30 percent of AMI.

This mismatch is even more striking in 

very low income households. 

Approximately 44 percent of households 

occupying this rental housing category 

earn more than 50 percent of the local AMI. 

Only 25 percent of the occupants are actually in the very low income category of 31 to 50 percent AMI. The remaining 32 

percent of households occupying this stock are actually in the extremely low income category of 30 percent AMI or less. 

That means that these extremely low income households are paying more in rent than they should be, resulting in a 

housing cost burden for those renters who can least afford it.
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Subsidized Multifamily Properties Remain an Important Source of Affordable Housing

With a total of 5.1 million units, 

subsidized affordable multifamily 

remains an important source of 

affordable housing, representing about 

a quarter of all multifamily rental 

housing. About 2.2 million units are 

subsidized with Low Income Housing 

Tax Credits (LIHTC) and 1.5 million are 

subsidized with Project Based Section 

8. As shown in the table to the right, 

this represents the substantial majority 

of units with active subsidies. 

However, it appears that there has 

been a decline in LIHTC units placed in 

service over the past few years. Prior to 

2008, approximately 120,000 units 

were placed in service each year. Since 

then, only about 80,000 units have 

been placed in service annually, a small 

number relative to the 2.2 million unit 

supply gap for very low income renters.

The amount of LIHTC awarded 

annually is fixed and based on 

population size of each state. In 

addition, not all tax credits support 

affordable rentals for families with 

children: About 30 percent are 

allocated for low income seniors. 

The most populous states receive 

the most tax credits allowing these 

states to have the highest 

production of new and rehabbed 

units, as shown in the adjacent 

chart. 

In addition, given that the LIHTC 

program is now 25 years old, 

many subsidized properties need 

renovation to avoid becoming 

obsolete. At a minimum, financing 

the preservation of this existing 

stock is an important component 

of maintaining current housing 

levels. 

Cannot Just Build Our Way Out 

Despite the rise in new multifamily construction starts – as high as 475,000 units currently underway as of August 2015 –

the multifamily market cannot build its way out of the current affordable rental housing shortage. In many places, new 

multifamily supply is inhibited by the rising prices of developable land and building materials along with fewer construction

workers, as seen in the charts on the following page.
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While it would seem that construction costs would be manageable in less expensive metro areas, it is not always the 

case. Indeed, construction costs can vary widely, depending on the location. According to 2013 data from RS MEANS,

which collects data on construction costs for commercial buildings, the average construction cost for a four-to-seven-story 

apartment building in the U.S. is about $168 per square foot (excluding land costs, soft costs, and financing costs). While 

that is close to the average for a few metros such as Baltimore ($167), Denver ($168), and even Miami ($160), it was far 

below the averages for not only such usual suspects as New York City ($237) and San Francisco ($220), but also for less 

likely places, including Pittsburgh ($184), Portland ($180), Detroit ($185), and Kansas City ($187).

As a result, developers appear more willing to take risks in those metros that have a large number of multifamily renters 

and that can command higher asking rents. Most new multifamily construction underway is primarily Class A properties 

located in about 12 of the nation’s largest metropolitan areas. For example, the metros with almost 20,000 units underway 

include New York, Washington, DC, Houston, Seattle, Denver, Boston, Austin, Atlanta, Los Angeles, and Dallas. There is 

far less construction underway in secondary markets. 

As an added challenge, even though many of these properties can have up to 30 percent of units earmarked for lower 

income renters due to local and municipal inclusionary housing requirements, it is unlikely that these requirements will 

produce enough supply to meet the ever-increasing demand for affordable rental units. 

Eliminating the Supply Gap Needs a Holistic Solution

With 23.0 million one-to-four-family rental units and 18.3 million multifamily rental units, eliminating the supply gap is more 

than a multifamily issue. The supply gap needs a holistic housing solution and, therefore, any comprehensive effort to 

eliminate the gap must also include one-to-four-family rental housing.

Tanya Zahalak

Senior Economist

Kim Betancourt

Director of Economics

Multifamily Economics and Market Research

David Swift

Senior Strategic Planning Analyst

Fannie Mae Economics and Strategic Research

November 2015
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Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Multifamily Economics and Market Research 

Group (MRG) included in these materials should not be construed as indicating Fannie Mae's business prospects or 

expected results, are based on a number of assumptions, and are subject to change without notice. How this information 

affects Fannie Mae will depend on many factors. Although the MRG bases its opinions, analyses, estimates, forecasts and 

other views on information it considers reliable, it does not guarantee that the information provided in these materials is 

accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these 

views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by 

the MRG represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie 

Mae or its management.