Multifamily construction surged in the Ninth District during the pandemic

August 26, 2022

Montana Lending

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If you drive around Sioux Falls, South Dakota, it’s hard to miss the apartment complexes sprouting up all over town.

Butch Warrington, building manager for Sioux Falls, said the city had “an incredible, just incredible number” of multi-family units licensed through July of this year.

Although this year has been exceptional, multi-family construction has been flourishing in the city for several years.

Sioux Falls isn’t the only area experiencing this multi-family bonanza. After nearly a decade of slow growth, most states in the Ninth District have seen residential construction surge, especially during the pandemic.

The total number of licensed housing units in the Ninth District is up 35% from 2019 levels, according to Census Bureau data. Although single-family construction has been healthy, the recent construction surge has been driven primarily by multi-family construction, which is a relatively new trend for the region.

Historically, new single-family homes have significantly exceeded the number of new multi-family units in the Ninth Ward. While there has still been more single-family than multi-family construction during the pandemic, a jump in multi-family growth over the past two years has closed most of that gap in the region.

Multifamily permits now account for almost half of the total housing permits issued in the district (Figure 1). This is the highest share of multi-family permits issued according to data available since 1980.

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The multifamily makes significant gains

Following the housing market crash in the mid-2000s, residential construction plummeted in the Ninth Ward and much of the country. In the years that followed, the total number of units permitted grew at a breakneck pace, with modest increases in single-family dwellings while multi-family construction remained largely stagnant.

Minnesota and Wisconsin were the early leaders of the region’s wave of multi-family permits. In Minnesota, the pace of new multifamily construction began to accelerate in 2014, then picked up another speed from 2018 (Figure 2). By 2021, annual multi-family units had grown nearly 2½ times their level of just eight years earlier.

The Twin Cities drove much of the increase, with multi-family permits consistently outpacing single-family permits in the metro area after 2017.

“We have this huge demographic of millennials who are often over-indebted and delaying household formation, [and this is] increasing the demand for rentals,” according to Cecil Smith, president and CEO of the Minnesota Multi Housing Association. “Since Minnesota has a large metropolitan area with good prospects for job growth, the institutional capital [for multifamily construction] started coming here.

Much of the initial activity was in the central cities of Minneapolis and St. Paul – and continues today. Minneapolis has authorized nearly 2,600 units through July, according to Housing First Minnesota.

But there’s also activity happening in the suburbs now, Smith said. “The suburban markets had all of that [multifamily housing] from the 80s and 90s that needed a refresh and new equipment. That’s where the focus is now: a highly appointed luxury product in the suburbs. »

In more rural states like Montana and South Dakota, multifamily growth was supercharged in 2020 after being largely stagnant in the previous decade.

Sioux Falls and Rapid City, South Dakota’s largest cities, have seen multifamily construction records over the past two years. In 2021, Sioux Falls reported a 183% increase in the number of multi-family units over 2019 levels. This trend does not appear to be slowing, as the number of multi-family units permitted through July 2022 has already exceeded the number total units in 2021.

Warrington, the city’s chief building official, hopes the recent surge will increase the city’s low vacancy rate of 3.7%.

“We have issued 2,512 multi-family units this year so far, so I think we would start to get to the point where we will see the vacancy rate go up a bit next year when they become lettable. It will be interesting what we see in a year.

Multifamily construction in Montana has also been strong lately, with new units more than doubling from 2019 to 2021. Single-family construction has been healthy but more stable in recent years. As a result, nearly 56% of all housing units licensed in Montana last year were multifamily, a level not seen since the report began (Figure 3).

Much of this recent growth in Montana and South Dakota has coincided with substantial increases in net migration to the states, where residential construction is surging to meet new demand.

Cheryl Cohen, administrator of the Montana Housing Division at the Montana Department of Commerce, explained how population growth has been a major factor in the recent growth of multifamily construction in the state.

“We had a net migration of just over 22,000 people from April 2020 to July 2021, which is quite significant,” Cohen said. “Builders responded to population growth and associated market demand, and investors saw the potential for good investment returns by looking at the historically high rents here as well as the low interest rates at the time.”

While much of the growth is happening in Montana’s biggest cities, Cohen noted there’s been more interest in building in smaller towns outside of cities.

“We are seeing an increase in construction in many communities like Belgrade, outside of Bozeman, or even in smaller towns like Townsend which are a stone’s throw from Helena,” Cohen added. “Since the immediate downtown area may be more expensive and less affordable, we are seeing this growth happening in adjacent transitional communities.”

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Despite the rise, demand still exceeds supply

While the recent surge in residential construction is impressive, it is still not enough to meet the high levels of demand in the area. Many parts of the Ninth District continue to feel the strains of nearly a decade of slowing housing production as home prices and rent levels continue to rise, especially in areas experiencing population growth like western Montana.

Home prices in Montana are currently up 48% from 2019 levels according to the Federal Housing Finance Agency Housing price index, which is the largest increase ever since reports began. Rents are also rising, putting pressure on residents of the state.

“We experienced a 37% rent increase in Lewis and Clark County from the first quarter of 2020 through the second quarter of 2022,” said Cohen of Montana Housing. “There were only four other counties in the entire country with a higher rent increase than that.”

Rent increases exacerbate housing affordability in Montana, according to Cohen, who noted that a quarter of renters in Montana have extremely low incomes.

Minnesota has a similar problem, despite resuming residential construction earlier than other states in the region. According to the Minnesota Housing Finance Agency, the state still lacked about 54,000 homes between late 2018 and early 2020.

“We need to build two to three hundred units at a time, not two or three infill units. It won’t be enough,” said Smith of the Minnesota Multi Housing Association. “We need large-scale housing built here.”

Construction remains solid despite increased challenges

Through June 2022, the total number of units permitted in the district continues to be high, and multi-family units permitted so far exceed single-family permits according to preliminary data from the Census Bureau.

However, ongoing challenges such as labor shortages in the construction industry, supply chain issues that drive up input prices, and recent increases in interest rates could have an impact. chilling effect on residential construction in the ninth arrondissement for the rest of the year.

The Twin Cities are already experiencing a slight slowdown in single-family construction as home prices and mortgage rates rise, dampening demand. However, a July report from Housing First Minnesota shows that multifamily construction is still progressing in the metro, seemingly undeterred yet.

Things aren’t slowing down in Sioux Falls for multifamily construction, either, according to Warrington, who recently met with an architect for a new 150-unit apartment building.

“Things are still pretty busy and active here,” Warrington said. “I thought I might start to see things slow down, especially with rising interest rates, but I haven’t seen it at all yet.”