After years of disastrous declines, are things finally starting to look up a bit for multifamily housing? Perhaps so. The multifamily housing sector is by no means poised for a boom, but a gradual recovery from current levels now seems possible.
Chart 1 shows multifamily housing starts. The chart begins with 1985, when multifamily starts reached their 1980's peak, and ends with the MBA economics department forecast for the remainder of 1991 and 1992.
The magnitude of the decline in the late 1980s and early 1990s is clearly illustrated in the chart. Multifamily units were started at an annual rate of more than 600,000 units during late 1985 and early 1986. After that, production fell virtually non-stop until early 1991 to only about 190,000 units--nearly a 70 percent decline.
The decline reflected a multitude of problems. First, the Economic Recovery Tax Act of 1981 put in place many economic incentives that encouraged investment in multifamily properties, such as attractive depreciation schedules. However, tax reform in 1986 removed many incentives and added onerous passive loss limitations that made many projects unprofitable. Partly as a consequence, production of new units slowed to a snail's pace after the reform.
Second, vacancy rates were clearly on the rise. Chart 2 shows rental vacancy rates for the U.S. as a whole and by region. Nationally, the vacancy rate rose to a plateau of 7.7 percent in 1987 and 1988. Since then, the vacancy rate has come down some but still remains well above the rates of the late 1970s or early 1980s.
All regions contributed to the rise in the vacancy rate from 1985 to 1987, particularly the South and West. During the early 1980s, multifamily starts soared in both regions at a much more rapid pace than those units could be absorbed. Partly as a result, rental vacancy rates in these two regions were higher than the other two regions by the mid-1980s. Things continued to deteriorate as the impacts of the collapse of energy prices severely depressed the econoies of the oil patch states, such as Texas, Oklahoma, Louisiana, Colorado and Wyoming in 1986 and 1987. After construction slowed considerably, vacancy rates finally started coming down in these two regions in the late 1980s.
The Northeast was not so fortunate. The vacancy rate continued to rise in the region, particularly in 1990, and partially offset the improvement in the South and West. As a consequence, the national average vacancy rate remained...