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Multi-family sector: Are dealers leaving opportunities on the table?

January 7/14, 2019: Volume 34, Issue 16

By K.J. Quinn

 

There is a silver lining for dealers and builders serving the multi-family housing market. Despite published reports that project a slowdown in 2019, numerous economic indicators provide cause for optimism that the market will drive most construction activity in the decade ahead.

Multi-family housing permits rose 4.6% to a seasonally adjusted rate of 480,000 in November compared to the same month in 2017, according to the U.S. Census Bureau and U.S. Department of Housing and Urban Development (HUD). While the modest increase was welcomed by industry members—following a year when the market slipped by 4% over 2016—the growth rate pales in comparison to 2009 to 2016. During this time, multi-family housing was a powerhouse in the overall construction recovery, as the number of starts rose 281%, Dodge Data & Analytics reported.

“We have heard from some larger builders that their sales have plateaued,” said Scott Baker, vice president of national accounts single-family at Shaw Industries. “They cited several reasons, such as rising costs and interest rates, as affecting their ability to sell homes.”

Lending rates indeed rose in 2018, which, when combined with years of home price appreciation, contributed to a 10-year low in housing affordability as measured by the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index. “This means despite improving income growth and tax cuts, housing demand will be under pressure...going into 2019,” Robert Dietz, NAHB’s senior vice president and chief economist, predicted.

Housing starts are expected to edge downward in 2019 as inflation heats up, interest rates rise more quickly and substantially and the economy begins to slow, Dodge reported. It projected multi-family starts will drop 8% to 465,000 units and fall 6% to $87 billion this year.

“The biggest concern multi-family housing has entering 2019 is the amount of new construction and redevelopment business that has gone on the last six to eight years, and whether there is overbuilding,” said Layne Dugger, Shaw’s vice president national accounts multi-family.

Market growth influencers
Nonetheless, multi-family is expected to quickly rebound thanks to several favorable trends. For example, vacancy rates have never risen to levels that would cut off construction despite the vast amount of new supply added during the recovery. High demand for rental apartments over the past eight years tightened rental-unit vacancy rates and drove up rents, Dodge reported, laying down prime conditions for multi-family housing development.

“Demand kept pace with supply and is expected to remain elevated in the years ahead thanks to demographic trends—population growth among young adults—that will remain supportive,” said Kim Kennedy, Dodge’s manager of forecasting. “The lure of downtown living will continue to remain strong, and incentives for homeownership may not be replaced. All these factors add up to a healthy multi-family housing market in the coming years.”

While all of this was happening, the supply of apartments and condominiums surged, as builders responded to rising demand fueled, in part, by young Americans who preferred to rent rather than purchase a home in the aftermath of the recession, according to published reports. “Many enjoy urban life with all the amenities a city has to offer,” said Christopher King, vice president of sales, Armstrong Hardwood Flooring. “But many city locations are out of reach, financially, for some first-time buyers.”

Indeed, changing demographics is reshaping multi-family housing dynamics. For example, more baby boomers are increasingly renting by choice as they downsize their living spaces. “It’s really interesting how the traditional multi-family property was really a function of necessity,” Shaw’s Dugger said. “As multi-family housing evolved with the next generation of renters, properties feature more Club Med-type amenities as a lot of dollars are being spent in public areas such as clubhouses, yoga rooms and fitness centers.”

Multi-family is a mixed bag, which includes everything from apartments and condos to senior living spaces, student housing and factory-built homes. Each sub-sector faces its own set of macro issues impacting growth. For example, NAHB reported the market share for townhouse construction continues to rise; the typical unit is about 2,000 square feet, up 23% year-over-year for the second quarter of 2018.

“We expect the trend toward smaller units to rise,” Dietz said. “We also expect gains for factory-built housing—although the market share will remain small—and ongoing dominance of the built-for-rent segment of multi-family.”

There is a general movement toward smaller housing designs following years in which builders disproportionately constructed high-end homes. “Smaller size units, both in condos and apartments, are trending,” said Randy Rubenstein, owner, Rubenstein’s Contract Carpet/North American Terrazzo, Seattle.

The market seems to be shifting to higher-density living, industry members say, as more people are trending toward the “live, work, play” lifestyle in cities. “We are seeing smaller unit sizes but overall larger projects,” said Curtis Blanton, vice president, DCO Commercial Floors (DCOCF), Athens, Ga.

Issues, trends affecting choices
When it comes to flooring, the multi-family builder business is witnessing shifts in buyer preferences similar to the single-family new home construction and residential remodeling sectors. While choices vary by region, carpet remains the leading flooring for multi-family spaces, observers say, although market share is dwindling due to the growing popularity of hard surfaces. “Designers are specifying the so-called clean look of LVT,” Rubenstein said. “Laminate and engineered wood flooring [are being specified] in condos and apartments. Carpet tile is being limited to the corridors.”

Hard surfaces and higher-end goods are trending up. “The evolution of the LVT business has really affected multi-family to a greater degree because end users are willing to pay more as long as the return on investment is higher,” Dugger said. “Initially, residents were willing to pay more for that look vs. carpet.”

Among the fastest-growing hard surfaces are LVP and WPC products. “Buyer preferences are leaning toward hard surfaces, mainly LVT because of its great looks, durability and water resistance,” Armstrong’s King said. “Laminate is also playing second fiddle to LVT, which is constantly improving its visuals, durability and performance features.”

While homebuyers still crave natural products such as hardwood, this is not a point of emphasis in most multi-family homes. “These tend to include less-expensive commodity products that require less time and skill to install and less maintenance post-installation,” said Anita Howard, COO, National Wood Flooring Association.

Finding and maintaining installation crews who can quickly install flooring in large projects is a major challenge, experts say, given the tight labor market and higher wages paid to skilled workers. “Fast track construction schedules are also a challenge,” DCOCF’s Blanton pointed out.

Opportunities, challenges
While multi-family housing can be a lucrative business, it requires residential flooring contractors to have the necessary resources and financial wherewithal to keep up with daily service demands. “The gravity toward efficiencies has affected the mix, margin and specification of product,” said David Gheesling, CEO, FEI Group.

This transactional business requires dealers to closely monitor day-to-day operations and cash flow to keep their businesses humming. Dealers are at the builders’ beck and call, and those who can’t keep up are left behind. “Construction schedules continue to get faster and more complicated,” Blanton said. “Full-service project management as well as dedicated supervision and quality control are a necessity.”

It’s also not unusual for dealers to receive notifications from builders for next-day installations on a jobsite. This requires staff to be in sync with product and inventory needs, which helps explain why most dealers servicing the multi-family business are reportedly well-financed specialists. “Dealers who target these sectors understand the demands,” said Bob Weiss, CEO, All Tile/Carpet Cushion & Supplies, Wood Dale, Ill.