MultiFamily Market Outlook - December 31, 1969

Multifamily Housing Businesses: How Many, and How Important?

The number of multifamily businesses in the United States depends, in part, on how one defines a multifamily business. Are they builders? Owners? Managers? The Census Bureau’s economic census looks at all three of those groups.

Let’s start with builders: the last economic census counted roughly 4,400 multifamily construction establishments. In one year, they produced about $16.7 billion worth of construction (most, but not all, of it new apartment buildings) and employed over 44,000 workers. In addition to the specifically identified multifamily builders, another 6,070 establishments (including remodelers and specialty trade contractors) reported specializing to some extent in multifamily construction. These 6,070 establishments employed a total of 54,000 workers.

Although these numbers may seem substantial, they are outstripped by the figures for firms that own and manage apartment buildings. This isn’t especially  surprising, given that such a small fraction of the existing stock is added each year through new construction. The economic census counted over 51,000 lessors of apartment buildings and more than 26,000 establishments managing residential properties. Together, these lessor and property management businesses employ well over a half-million workers. Apartment buildings owned by Real Estate Investment Trusts (REITs) accounted for a smaller, but still significant, amount of economic activity.

The Economic Census

Even those in the multifamily industry who are quite familiar with federal data collection efforts such as the decennial Census and the survey of construction (used to generate the official housing starts numbers) may not know that there’s something called the economic census. Nevertheless, it’s a major government undertaking, designed to be the premiere source of information about the structure and activity of businesses in the United States. The Census Bureau conducts the economic census by mailing industry-specific forms to individual companies, and the companies are then required by law to provide information about each of their business establishments (relatively permanent addresses) to the Census Bureau. At last count, the Census Bureau mailed more than 600 versions of the form to a total of over 5 million companies.  

Although its antecedents can be traced back to the early nineteenth century, the first completely integrated economic census to cover a wide range of industries in a comprehensive fashion was in 1954. Since then the law has been changed and now requires an economic census twice every decade — in years ending with a “2” or a “7” — so that the latest economic census was undertaken in 2002. But a 2002 economic census means a census of business activity taking place in 2002, so that  data collection can’t be completed until well into 2003. And it’s a massive amount of data that takes awhile to compile and tabulate, so many of the more than 1,500 reports that will eventually be produced from it have not yet been released.   

Preliminary versions of all 651 reports in the “industry” series are now available, however. These provide summary statistics on the volume of business and people employed in each industry (Other series to be released in the future will give more detailed breakdowns by geography and products produced). Although the public can access these reports free of charge on the Internet, the multifamily sector is spread over more than one industry, and some multifamily-related activities are subsets of broader industries that you can find only by searching through tables toward the back of  these reports. So it’s perhaps worthwhile to summarize the information in one place for multifamily developers, owners, and managers who may lack the time to search through all the relevant documents.

Multifamily Builders

In the system used by the Census Bureau, new multifamily housing construction is classified as industry 236116. It includes general contractor establishments whose primary business activity is building new high-rise, garden, and townhouse apartments; multifamily design-build firms; and multifamily housing construction management firms that act as general contractors. As a distinct industry, it gets its own industry-series report in the economic census.

The census report shows that there were 4,397 such multifamily construction establishments in the U.S. in 2002 (Table 1). Recall that the census defines these establishments as permanent offices of construction companies, so a single company may — and often does — contain more than one construction establishment. 

Taken as a whole, the 4,397 multifamily builders had a significant impact on the national economy. They produced a total of $16.7 billion worth of construction in 2002. This can be broken down into work subcontracted out, the cost of materials purchased (including components, supplies, and fuels), and value added to the final product by multifamily builders. In 2002, the 4,397 multifamily construction establishments subcontracted out $9.0 billion, purchased $3.6 billion worth of materials, and added another $4.4 billion in value. 

The value-added component includes employee compensation. In 2002, the 4,397 multifamily construction establishments carried 44,384 employees on their payrolls, to whom they paid a total of $1.7 billion in wages, salaries, and benefits. The figure of 44,384 includes workers employed in any type of job. Nearly 28,000 of them were actual construction workers. Multifamily builders, of course, typically employ many additional construction workers indirectly through subcontractors.

The census report on multifamily construction also contains two pages of general business and employment statistics broken down by state. For readers interested in the geographic detail, these pages were extracted and are posted to the NAHB Web site as a pdf file. The states with the greatest number of multifamily establishments in 2002 were California (413) and New York (400).  No other state had more than 300, as Florida came in a distant third with 278.  The 278 multifamily builders in Florida did $2.8 billion worth of construction work, however, considerably more than multifamily builders in either California ($1.8 billion) or New York ($1.6 billion).  

Although the construction work done by multifamily builders in 2002 includes some ancillary activities such as remodeling and single-family construction, production of new multifamily housing accounted for three-fourths of the $16.7 billion total ($12.6 billion). 

Other Multifamily Construction

On the other hand, some new apartment construction is carried out by firms whose primary business activity is some other form of construction. The detailed breakdown of construction industries in the economic census is as follows:

236  Construction of Buildings
236115 New Single-Family Housing Construction (except Operative Builders)
236116 New Multifamily Housing Construction (except Operative Builders)
236117 New Housing Operative Builders
236118 Residential Remodelers
236210 Industrial Building Construction
236220 Commercial and Institutional Building Construction
237  Heavy and Civil Engineering Construction
237110 Water and Sewer Line and Related Structures Construction
237120 Oil and Gas Pipeline and Related Structures Construction
237130 Power and Communication Line and Related Structures Construction
237210 Land Subdivision
237310 Highway, Street, and Bridge Construction
237990 Other Heavy and Civil Engineering Construction
238  Specialty Trade Contractors
238110 Poured Concrete Foundation and Structure Contractors
238120 Structural Steel and Precast Concrete Contractors
238130 Framing Contractors
238140 Masonry Contractors
238150 Glass and Glazing Contractors
238160 Roofing Contractors
238170 Siding Contractors
238190 Other Foundation, Structure, and Building Exterior Contractors
238210 Electrical Contractors
238220 Plumbing, Heating, and Air-Conditioning Contractors
238290 Other Building Equipment Contractors
238310 Drywall and Insulation Contractors
238320 Painting and Wall Covering Contractors
238330 Flooring Contractors
238340 Tile and Terrazzo Contractors
238350 Finish Carpentry Contractors
238390 Other Building Finishing Contractors
238910 Site Preparation Contractors
238990 All Other Specialty Trade Contractors

Among the construction establishments that deal primarily in buildings but are not specifically defined as multifamily builders, operative builders (sometimes called “spec” builders, who build residential buildings on their own account for sale) built $3.3 billion worth of new apartments, and those who build primarily single-family homes also built new apartments valued at a total of $0.5 billion. The amount of new multifamily construction undertaken by remodelers was negligible; and if any of the firms specializing in industrial or commercial buildings also built apartment buildings, the industry reports did not break it out from other building construction for separate reporting.  

This also was true of establishments in the heavy and civil engineering industry categories, which include land subdivision. If any of these establishments built apartment buildings, the economic census did not break it out from other construction activities.

On the other hand, the economic census did report on new apartment construction for a few categories of specialty trade contractors. But much of this is included in the value of work subcontracted out by the multifamily builders, so the value of construction work done by the specialty trades shouldn’t be added to the value of construction work done by multifamily builders, as that would result in double counting. 

There is another way to analyze the specialty trades, however, and that is to look at contractors who specialize in apartment buildings. The economic census reports on multifamily specialization for three trades — framing, masonry, and painting contractors. The census considers them specialized if they do more than half of their work in particular structure type, but many specialize much more heavily than that. Depending on the particular trade, 40% to 50% of the contractors who specialize at all in multifamily specialize in it 100%.

Table 1 shows statistics for these multifamily-specializing trade contractors, including payroll information and the value of their construction work. Again, to avoid double counting, subcontractor construction value shouldn’t be added to builder construction value, but the numbers provide a rough idea of the average size of the businesses.

The table shows similar information for operative builders and remodelers that specialize in multifamily. Unfortunately, for confidentiality reasons, the Census Bureau suppresses much of the information about operative builders. Some of the information on remodelers also is suppressed, but enough is provided to make a reasonable imputation of the missing pieces possible.

In addition to the 4,397 multifamily builders employing 44,384 workers in 2002, the table shows another 6,070 construction establishments that specialize to some extent in multifamily and employ at least another 53,976 workers. The total payroll for the 98,360 workers in all these types of construction businesses was $3.4 billion in 2002 including wages, salaries, and benefits.

Owners and Managers

Firms that own and manage apartment buildings also can have a very large impact on the economy. While new multifamily construction (as measured by housing starts) has been running at a healthy 330,000-to-350,000 per year, the stock of multifamily units for businesses to potentially own and manage is roughly 32 million, according to the 2003 American Community Survey.

In the economic census, these are included in the broad “Real Estate and Rental and Leasing Sector.” Within that sector, industry 5311101 is “Lessors Of Apartment Buildings,” which includes establishments primarily engaged in renting apartments buildings with 5 or more housing units to tenants.  

In 2002, there were 51,502 of these residential property owning establishments.  They employed 257,624 workers to whom they paid a total of $5.8 billion in wages, salaries, and benefits (Table 2). In addition, residential property owners employ other workers indirectly by contracting with firms to provide a variety of services such as property maintenance and management. 

The economic census also captures firms specializing in residential property management (industry 531311). Although it doesn’t break their business down by structure type, the statistics on lessors suggest that a very large share of residential property management involves management of apartment buildings. In 2002, there were 26,223 establishments whose primary business was managing residential property. They employed 289,870 workers and paid them a total of $8.2 billion in wages, salaries, and benefits.

Again, the statistics are based on establishments rather than companies. However, the Census Bureau usually doesn’t count individual properties rented or managed by property lessors or property managers as separate establishments, but only the permanent offices out of which they rent or managed. This tends to minimize the difference between firms and establishments in the residential property leasing and management industries.

In the economic census, real estate lessors do not include REITs, which have become a significant part of the industry. Instead, REITs are captured in the broad finance and insurance industry. Here, the census reports rent receipts by type of structure, so we can include some multifamily information from REITs in Table 2 (although the amount of payrolls attributable to apartment buildings is not provided directly and has to be estimated).

All the statistics discussed so far have been based on firms with paid employees — the primary focus of the economic census. This means that we have systematically been excluding small “mom and pop” operations. In general, there are a large number of these small operations scattered throughout the U.S. economy. The 2002 economic census provides some statistics on “nonemployers,” but these statistics don’t say much about the multifamily sector, as they don’t separate multifamily structures from single family. (In property renting and management, they don’t even separate residential real estate from nonresidential.) Readers who are nevertheless interested in nonemployer statistics can find them in simple tables on the Census Bureau’s web site at www.census.gov/epcd/nonemployer/2002/us/US000.HTM.

Starts Remain High — Possibly a Record-Breaking Pace

Like a number of other construction statistics, multifamily starts rebounded strongly in April. After dropping by 106,000 units in March, the (seasonally adjusted annual) starts rate in buildings with at least five apartments increased by 81,000 the next month, to 351,000. The starts rate has been fluctuating lately, in any particular month falling either considerably above or below the sustainable long-run trend. Since September, the five-plus starts rate has averaged 326,000. If sustained over a full year, that would be the largest annual starts number since 1988.

Source: U.S. Census Bureau; NAHB Economics Group

The high average starts rate has resulted in a total of 377,000 five-plus units under construction at the end of April — the most at the end of any month since July of 1987. Meanwhile, some of the backlog of unused permits in the pipeline has been worked off. The number of five-plus units authorized but not yet started edged down 3.7% to 55,200 in April. That's the lowest it's been since last July, but still more than any month in the first half of 2004, so on a year-over-year basis, five-plus permits are being issued at a faster rate in 2005 than they were in 2004. On balance, these statistics suggest that starts are likely to slow from their fast pace in April, but not by enough to prevent the second quarter from being a relatively strong one for multifamily production.

Energy Price Rise Makes Real Rent Index Decrease

Although residential rents increased at an apparently healthy (seasonally adjusted annual) rate of 4.0% in April, that wasn't enough to prevent further erosion in the real rent index, according to the Consumer Price Index (CPI) data released by the U.S. Bureau of Labor Statistics on May 18. The erosion occurred because the overall CPI was meanwhile increasing at a rate of 6.4%. 

While food prices increased somewhat, most of the inflation was driven by energy prices, which rose sharply for the third month in a row. As a result, the real rent index (which adjusts rents for overall inflation) declined for the forth consecutive month — down to 107.2, the lowest it's been since February of 2003. The timing of the decline may seem peculiar, given that vacancy rates have improved recently. A partial explanation may be that single family rental properties included in the CPI rent index are responding to market conditions with a lag.

'Soft Spot' Gone, Interest Rates Will Keep Rising

Data revisions and accumulating evidence show that the early year “soft spot” in the economic expansion was largely an illusion. Growth of real gross domestic product (GDP) was revised up for the first quarter, from 3.1% to 3.5%, reflecting stronger spending on consumer goods and housing as well as a better foreign trade balance. The overall economy apparently is moving ahead at a solid pace in the second quarter as well, although there are some mixed signals.

The labor market report for May was quite a mixed bag, with unexpectedly weak growth in payroll employment combined with strong growth in household employment and a downtick in the unemployment rate. The financial markets seemed to focus on the weak elements of the report, although a comprehensive reading suggests the labor market still is solid. Financial markets were thrown for a loop on June 2 when Richard Fisher, the new president of the Federal Reserve Bank of Dallas and a voting member of the FOMC, said on national television that the Fed is in the “eighth inning” of monetary tightening, and that the next FOMC meeting will be the “ninth inning” in the central bank’s “contest against inflation.” The baseball analogy probably did not sit well with Chairman Greenspan and many of the FOMC members.

NAHB’s forecast still assumes the Fed will continue to move ahead at a determined but “measured” pace, raising the funds rate by another quarter point (to 3.25%) at the June 30 FOMC meeting and taking it up to 4% by year end (pegging the bank prime rate at 7%). Some further increase may well occur in 2006 as long as the economic expansion continues to generate upward pressure on unit labor costs and core inflation. Meanwhile, bond prices have surged and bond yields have fallen despite the evaporation of the early-year economic “soft spot,” the obvious upside threats to core inflation, and the FOMC’s expressed intentions to keep raising short-term rates. It’s entirely possible that bond market participants have overreacted to various pieces of news, and that some rebound in long-term rates is highly likely before long.

Multifamily Stock Index Shows Almost Three Times the S&P 500's Annual Gain

During the month of May, the MFSI increased by 76 points, or almost three-and-a-half percent. With this sizable increase, the MFSI is at its second highest reading of all time, and just 81 points off its all-time high set five short months ago. With this most recent rise, the MFSI now finds itself almost 25% higher than it was just 12 months ago. During the past month, the S&P 500 with dividends also rose by almost 3.5 %, and is now almost 8.5% higher than it was 12 months ago. Because the MFSI and the S&P 500 with dividends reinvested increased by about the same amount during May, the performance gap—or percentage difference—between the two indexes remained unchanged from the 116% reported in April, which is just 7 percentage points below the high-water mark set in December 2004.

Despite the very strong 47.3% rise in the S&P 500 since its most recent low in early 2003, the MFSI has risen a staggering 65% during the same 27 months. In addition, the MFSI continues to dramatically outperform the S&P 500 over even longer time periods including the past three, four, five and six years. Since December 1998, the MFSI has risen by 131% while the S&P 500 with dividends reinvested has gained only 6.7%. 

During the month of May, the price-to-earnings ratio (P/E) of the MFSI declined to 18.45, while the dividend yield, defined as the total cash dividend payments divided by the current stock price, rose slightly and now stands at 5.62%. The MFSI is an index of 27 publicly traded US headquartered firms, including 23 REITs, principally involved in multifamily ownership and management.