Copyright© 2015 Fannie Mae 1

Multifamily Market Commentary – July 2015

Affordable Multifamily Feeling the Squeeze of Higher Development Costs 

Despite the rise in new multifamily unit construction starts – as high as 476,000 units annualized as of June 2015 – in 

some parts of the country the current stock of multifamily rental units is having difficulty meeting housing demand. 

Nationally, a variety of economic and demographic circumstances is resulting in extraordinary demand, simultaneously

coupled with undersupply. This problem is even more acute for affordable and workforce rental housing, according to a 

report from the Joint Center for Housing Studies of Harvard University, because most new multifamily housing consists of 

high-end apartment projects. 

This ongoing demand for multifamily rental units stems from multiple factors, including the after-effects of the Great 

Recession as reflected in slow job and wage growth, rising single-family housing prices in some of the larger metropolitan 

areas, and the number of Millennials trying to form households of their own, most of whom seem to prefer renting to 

homeownership – at least for now. 

At the same time, in many places new multifamily supply is inhibited by the high cost of construction. In a recent report 

from the National Apartment Association, this mix of demand and undersupply was described as “the perfect storm.” Add 

in the rising prices of developable land and building materials, and this perfect storm has resulted in a proliferation of 

Class A properties and a dearth of more affordable rental housing.

The New Normal

Supply and demand is a primary driver of 

increasing rental rates. Multifamily demand is 

reflected in the rise in estimated rental rates that 

are up 10.0 percent from their pre-recession 

peak in the third quarter of 2008 – a 20-quarter 

straight increase since the first quarter of 2010,

as illustrated in the chart to the right. The 

vacancy rate has been decreasing steadily 

despite a recent uptick and is estimated at 4.7

percent nationwide as of the second quarter 

2015. 

Despite the increase in new multifamily 

construction – with about 340,000 new multifamily 

units started in 2014 alone – as seen in the chart to 

the right, fundamentals for rental demand remain 

stable throughout most of the country.

We believe that nationwide, projected employment 

growth coupled with solid demographic trends and low 

homeownership rates will keep rental household 

formations healthy over the next 12-18 months. This, 

in turn, is expected to help the multifamily rental 

sector remain stable, with annualized rent growth 

slowing down but nevertheless remaining positive.

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

$925

$975

$1,025

$1,075

$1,125 Monthly Rent Level

Vacancy Rate

Source: Fannie Mae Multifamily Economics and Market Research Estimates

Estimated National Rent and Vacancy Levels

0

50

100

150

200

250

300

350

2006 2007 2008 2009 2010 2011 2012 2013 2014

Multifamily Housing Starts

Source: U.S. Census Bureau
2

Demand Spurred by Demographics 

Why the increase in multifamily rental housing demand? One key reason is demographics. The Great Recession 

particularly hurt Millennials, which the Pew Research Center defines as those born after 1980. According to an October 

2014 report from The Council of Economic Advisors, unemployment peaked in 2010 for individuals aged 18 to 34 years 

old at a rate above 13.0 percent. However, as the national economy is picking up steam and job growth has been 

accelerating, more Millennials are moving away from their parents’ homes and into apartments, forming new households,

and ultimately spiking multifamily rental housing demand. In fact, according to the Urban Land Institute’s 2015 Community 

Survey, 73 percent of Millennials say they are likely to move in the next five years, perhaps suggesting ongoing demand 

over the long-term forecast. This is significant for the multifamily sector because a sizable amount of multifamily rental 

demand comes from people aged 34 years old or younger, as illustrated in the pie chart below. 

Millennials’ overall lifestyle preferences appear to be different from preceding generations. For example, according to the 

survey Millennials are less likely to own a car or purchase a home; and while they expect to buy homes in the future, the 

survey indicates they are less likely to do so than previous generations. The survey also gleaned a locational preference. 

Millennials stated that they prefer city centers as opposed to suburban or rural areas, with 63 percent stating that they 

would like to live somewhere that did not require a car. 

This type of demand preference has been another catalyst in pushing up the price of prime real estate in central business 

districts as developable land becomes more scarce. In addition to this difference in lifestyle preferences and a tendency to 

rent instead of own, likely the most important reason that Millennials are driving rental demand is their sheer size in 

numbers. According to the Census Bureau, Millennials now are the largest segment of the population at an estimated 87 

million people; in contrast, Baby Boomers total 76 million. It is perhaps no wonder multifamily developers are starting to 

focus on the wants and needs of Millennials. 

Focus On Urban Centers 

Millennials’ preferences to live in urban centers as opposed to outlying suburbs has shifted many developers’ attention to 

the urban core, which in turn has greatly impacted land prices. Demand appears to be highest in neighborhoods that are 

centrally located and walkable. This urban focus is reflected in the Real Capital Analytics/WalkScore repeat sales index,

which measures trends in prices of highly walkable, somewhat walkable, and car dependent locations. 

< 35 35-64

65+

Percent of Multifamily 

Renters by Age 

 65

 66

 67

 68

 69

 70

 71

Millions

U.S. Renter Population Forecast: Age 20-34 Cohort

Source: U.S. Census Bureau Estimates Source: 2013 American Community Survey
3

According to this index, the price of apartments in highly walkable central business districts outperforms all other 

locations, as seen in the chart below. Developable land in urban areas is comparatively scarcer than in suburbs, and this 

has placed more pressure on land prices in these high demand, low supply areas. As a result, the rise in value of 

apartments located in highly walkable central business districts has increased dramatically since the end of 2009.

Rising Land Prices

Land prices tend to be extremely volatile and comprise a 

significant portion of a developer’s total cost of construction. 

Property sales and land acquisition are subject to extreme 

competition between developers and can lead to multiple bids that 

push up the price. These competing bids are a reflection of what 

the developers assume rent increases and declining vacancy rates 

will be over the near term. The price of developable land has been 

on the rise for quite some time. 

The CoStar Commercial Repeat Sales Index compares the prices 

of commercial properties each time they have been sold, as seen 

in the chart below. The value of U.S. commercial vacant land has 

experienced steady gains since the recession, but is still 23 

percent below peak levels that occurred in late 2007. According to 

CoStar, U.S. commercial land prices experienced its trough much 

later than other commercial property types and is considered to be 

in an earlier phase of recovery. Nevertheless, commercial land 

prices have increased by more than 20 percent over the past year 

alone.

Key Building Materials Prices Still Outpacing Inflation

A fundamental input in construction is the building 

materials. The cost of these materials have a direct 

impact on construction and are susceptible to large 

variation. Furthermore, the demand for construction 

materials is relatively inelastic due to a lack of 

substitutes; developers cannot replace concrete and 

steel, for example. Although the recent drop in oil prices 

may correlate to a decrease in price for certain materials,

such as asphalt, there are several core building 

materials, such as gypsum and lumber, that have 

experienced continued price climbs. 

Engineering News-Record (ENR) reported that costs for 

lumber, steel, and cement have experienced increased 

rates of inflation. The ENR 20-city average price for 2x4 

lumber was up 5.7 percent, and cement prices rose 4.8 

percent over the past year and remain at historic highs.

0

25

50

75

100

125

150

175

200

225

Index Value (2000 Dec = 100)

U.S. Land

CoStar Commercial Repeat Sales Index 

Source: CoStar CCRSI May, 2015

Highly Walkable CBD Highly Walkable Suburban

Somewhat Walkable Suburban Car Dependent Suburban

Source: Real Capital Analytics

Prices for Apartments and Walk Score
4

The most recent report from the U.S. Bureau 

of Labor Statistics states that the nonseasonally adjusted Consumer Price Index 

(CPI) for all urban consumers was at zero 

percent for the past year. However, the 

percent increases for key building materials 

have well outpaced the CPI, in spite of recent 

declines. 

Over the past few years, rising material costs 

helped push up the cost of construction, 

which likely contributed to the increase in 

more expensive projects. And a higher cost of 

construction is most likely going to be passed 

onto tenants in the form of elevated rent 

levels in Class A properties.

Cost of Construction Index 

Engineering News-Record’s Construction 

Cost Index reflects the total cost of 

construction. The index is a weighted 

aggregate index of prices for structural steel, 

Portland cement, lumber, and common labor.

It does not produce a comprehensive 

breakdown of cost nor does it include land or 

financing costs. It does represent basic trends 

for construction costs, and as seen in the 

chart to the right, total construction costs 

continue to outpace inflation at a fairly 

substantial rate.

Construction Labor Costs Rising Even 

Faster

One of the most critical cost inputs in 

construction is the labor. Construction worker hourly wages have been climbing steadily. Moreover, insurance costs also

are increasing and now comprise a total of 8.0 percent of total compensation for construction workers. With construction 

starts at historically high levels, the number of construction workers has begun to rise, but as seen in the graph below left, 

it has yet to reach pre-recession levels. 

The shortage of qualified construction labor is cited frequently by developers as a hindrance to completing projects on 

time, if even started at all. As a result, developers have paid higher wages, contributing the higher cost of construction, as 

illustrated in the graph below. 

Where Have All the Construction Workers Gone?

During the Great Recession, when construction activity plummeted, many construction workers are believed to have 

exited the industry and never returned. According to a May 1, 2014 article from The Wall Street Journal, “The shortage of 

skilled construction workers also partly reflects the return of Mexican workers to their home country during the downturn 

without returning since.” The article goes on to say that developers also believe that “they have lost skilled labor to energy 

companies drilling in northeastern Colorado and North Dakota, where many of the top construction workers went during 

the downturn.”

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Lumber Gypsum Concrete CPI

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

CPI ENR

Materials Year over Year Percent Change

ENR CCI and CPI One Year Percent Change

Source: BLS Consumer Price Index; ENR Construction Cost Index

Source: BLS Producer Price Index
5

Indeed, the unemployment rate for construction workers in 2014 averaged 8.9 percent, down from a high of 27.1 percent 

during the recession. But not all construction-related jobs are equal. According to a June 2014 survey completed by the 

National Association of Home Builders, “the share of builders reporting a shortage of labor ranged from a low of 25 

percent for building maintenance managing to 63 percent for rough carpentry.” The same survey showed significant 

shortages of framing crews and bricklayers. These labor shortages negatively impact the construction timeline, as well as 

labor costs, both contributing to overall higher construction costs. 

 

Multifamily Construction Case Study: High Construction Costs + High Land Prices = High Rents

Because of high construction costs, developers have been focusing on acquiring premium development sites to make 

projects more profitable, but these are not easily found and it is clear that there is intense competition for prime locations.

As an example of the scarcity of such sites, a national developer that was interested in purchasing an empty lot located in 

Southern California made an initial offer of more than $65 million for the property, but then had to make a subsequent 

higher offer due to the number of competing bids. Nevertheless, another competitor offered significantly more to become 

the winning bid.

According to the national developer, “land prices expand and contract with the market and competing for developable 

sites is tough.” The developer stated that most other construction costs are equal but it is the variability and fierce 

competition of land prices that add millions of dollars to a project’s overall construction cost. The developer pursuing the 

Southern California lot had penciled in about 21 percent of the total budget for purchasing the lot – a fairly significant 

amount. 

Underlying Volatility In Both Hard and Soft Costs

In the scenario noted above, the soft costs for the initial project included design and engineering fees, legal fees, 

corporate overhead, and permit fees. To get an idea of the disparity of the underlying soft costs, legal fees accounted for 

just 1.0 percent but permits accounted for more than 60.0 percent of soft costs. Typically, permitting costs are a large 

4,000

4,500

5,000

5,500

6,000

6,500

18

19

20

21

22

23

24

25

26

Number of Non-Supervisory 

Construction Workers

Average Hourly Earnings of 

Non-Supervisory 

Construction Workers

Source: Bureau of Labor Statistics
6

percentage of soft costs but vary greatly depending upon location. This case shows how permits and fees can add up 

quickly and significantly increase the cost of construction. 

According to the developer’s proposed budget outline, this Southern California project had hard costs of well over $150 

million, accounting for more than half of the total projected cost. Materials are an integral part of the construction process 

and a sizable portion of a project’s hard costs, as well as labor costs. The developer also expressed concern about finding 

skilled labor in Southern California and noted that over the past few years it has continued to be difficult to find any type of 

construction worker in general.

With a development budget totaling several hundred million dollars, the rents needed to be fairly high for the project to be 

profitable. The developer’s initial plans for this building included 600 to 800 units with approximately 10.0 percent of the 

units being designated as affordable. While increasing the number of units constructed usually lowers the cost per unit, 

the developer still planned on pricing rents toward the higher end of the market. Nearly all of the market rate rents were 

above $2,000 a month, as seen in the table below. Clearly, the budgeted construction costs for this proposed 

development would have had a direct cause and effect on the rent levels. 

Apartment Type Average Cost

Studio $ 1,750.00 

1 Bedroom 1 Bathroom $ 2,050.00 

2 Bedroom 2 Bathroom $ 2,625.00 

3 Bedroom 2 Bathroom $ 3,100.00 

Multifamily Development Concentrated in Larger Metropolitan Areas

According to data from the Dodge Data & Analytics Construction Pipeline, more than 503,000 multifamily rental units are 

underway as of July 2015 compared to 391,000 units a year ago. Of this total, approximately 332,000 multifamily rental 

units are expected to come online this year alone. What is interesting is not just the rise in total multifamily rental 

construction volume, but where much of that supply is located. 

As seen in the chart below, there are only 10 metropolitan areas with more than 20,000 units underway, all of which are

larger primary metros with more than 2 million people. Within these metros, many developers have focused on certain 

submarkets and neighborhoods, resulting in a concentration of multiple new projects all located near one another and all 

being completed and coming online within a fairly narrow timeframe between now and 2016. Unsurprisingly, many of 

these multifamily projects are offering primarily Class A rental units, which command the highest rent levels in their 

respective submarkets, thereby compounding the scarcity of new affordable rental units.

Cost Percent

Financing 10.7%

Land 21.0%

Hard 53.2%

Soft 15.1%

Total 100.0%

Developer Budget and Average Planned Asking Rents 

Multifamily Construction Case Study – Southern California Lot

Source: Fannie Mae Multifamily Economics and Market Research
7

Alternatives Needed For More Affordable Units

The outlook for the multifamily rental housing sector appears stable over the long term. Median household income is 

projected to continue rising over the next few years. Job growth also is projected to remain steady along with increased 

household formations. Nevertheless, despite the ongoing improvement in the national economy and most local job markets, 

the declining amount of affordable and workforce multifamily rental housing is worrisome. The many barriers to new 

construction of this type of housing – higher construction costs, labor issues, and rising land prices – are likely to remain 

stubbornly in place, especially in the larger primary metropolitan areas. Exacerbating this trend is that on a national basis 

approximately 100,000 multifamily rental units are removed from service each year due to obsolescence, and many of these 

tend to be older, and usually more affordable units, which are likely not being replaced in total with similar units. 

There may be ways to somewhat offset the loss of these units. For instance, new subsidized development projects could

be put in place and developers could continue to offer a certain number of units at below market rate rent levels. Additionally, 

a concerted effort on preserving more affordable units could be effective, and can be accomplished through offering a variety 

of financing vehicles that support modest improvements in existing properties. We expect demand for multifamily rental 

housing is here to stay and these options might help make it available at all income levels. 

John-Louis Pane

Intern

Kim Betancourt

Director of Economics

Multifamily Economics and Market Research

July 2015

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.

Multifamily Apartment Units Underway – Select Metropolitan Areas

0

10

20

30

40

50

60

70

80

90

100

Thousands

2014 (Completed)

2015 (Completed)

2015

2016

Beyond

Source: CBRE-EA/Dodge Pipeline, July 2015 

NOTE: Pipeline data is not an actual forecast of activity, it is a monitor of activity reported on to-date. As more projects are 

planned and tracked, figures in future periods might go up.