Multifamily Market Overview: Rising interest rates and a lack of single-family homes are fueling growth in the multifamily market - November 2022
By Jennifer Bardoner
As inflation and rising interest rates keep many would-be buyers out of the housing market, manufacturers are anticipating strong demand within the multifamily sector for the foreseeable future, especially on the new apartment side. Meanwhile, the ability to work remotely is helping to create new growth markets. And with product again flowing freely, manufacturers are stocked and ready to capitalize.
With the nation’s housing supply critically underbuilt-both in single-family homes and rental units-the multifamily market is strong, especially as rising interest rates sideline many potential homebuyers. “Multifamily is growing, and the reason it’s growing is that [interest] rates are high, and people can’t afford to buy a house, so they’re going to rent, and they’re going to rent an apartment,” says Market Insights economist Santo Torcivia.
Mohawk Industries senior vice president of builder/multifamily Brian Dolfi points to estimates that the country needs approximately five million more single-family homes, coupled with the fact that current conditions have pushed builders’ lead times. “There have been a lot of issues slowing down new home builds, which has also created demand for multifamily,” he says, explaining that typical single-family build times have stretched from six up to ten or 11 months.
“Supply chain issues, raw material costs, production costs, labor and interest rates, all those things have put [single-family] housing out of reach, which makes multifamily more attractive,” says Dan Butterfield, Dal-Tile’s vice president of residential sales.
Yet there are not enough rental units to satisfy demand. Emser multifamily segment director Sandra Rakar cites a new study on behalf of the National Multifamily Housing Council and the National Apartment Association that found the U.S. has a shortage of 600,000 units and estimates another 3.7 million units are needed through 2035 to meet demand, especially as this generation is waiting longer to start a family and purchase a home.
“With the anticipated economic changes providing a challenging environment to purchase new construction homes, combined with the expected needs for home units, we expect multifamily to play a significant role in the coming 18 to 24 months,” MSI vice president Michael Dugan says.
Noting projects already in the industry’s pipeline, which Rakar says are up around 20% compared to 2021, she agrees that “apartment construction is forecast to be elevated at least into 2024.”
Bentley Mills serves the specified renovation and new construction aspects of the market. “We see plenty of activity in the quotes and our activity in the market around multifamily,” says president and COO Jay Brown. “We have it in our backlog, but we are seeing new orders come in and new quotes go out.”
According to Torcivia, this level of new multifamily construction hasn’t been seen since the 1980s. “Because apartment vacancies are low (5.6%), that pushes up demand for new apartments, so there’s a driver there for more multifamily construction, and the people building these apartments apparently aren’t fazed by the higher interest rates,” he says.
Per U.S. Census Bureau data, the South accounts for nearly half of this year’s new multifamily starts and authorizations, followed by the West at roughly one quarter. While the South saw a drop in new starts in September, activity in other markets edged up. “It has slowed somewhat, but not very much,” says Todd Lomas, director of multifamily, dealer and CBRE sales for Milliken. “The hot markets-the markets that are growing-they are still continuing to build new buildings.” He expects market growth through 2025, “and primarily in new construction.”
He and Dolfi narrow the primary activity zone to the Southeast and Southwest, where Dolfi says “ten or 12 states represent probably 60% of these opportunities,” including North Carolina, Florida, Texas, Arizona, Colorado and California.
David Sheehan, vice president of residential hard surface at Mannington Mills, points to recent announcements that Tesla and Apple planned to relocate to or expand in Texas as examples of hotspot indicators. “Where business is going, you’re seeing the multifamily follow,” he explains. And several of our sources mentioned off-campus student housing as opportunity-drivers.
Estimating that somewhere in the neighborhood of 430,000 new units will come online next year, a 9% drop from this year, Sheehan notes, “While the number of new starts would suggest that we are going to see a slight decline in the number of new multifamily units that are going to be constructed, it’s still a relatively high number versus pre-pandemic.” And even amid the anticipated slowdown, Lomas expects multifamily will still be “pretty strong compared to some other segments in the specified market.”
Mannington and Dal-Tile are both working on strategies to target more of the new construction multifamily market, with Dal-Tile set to debut its Multifamily Studio in 2023. Featuring a curated selection of products across five tiers of price points, with a special focus on amenity centers, where finishes tend to be higher-end, Butterfield says a factory-direct program may also be included “to cut out costs.”
The multifamily market tends to be especially cost-conscious, and the industry has seen a staggering number of price increases over the past few years. Though those have largely abated, there is some concern that widespread inflation could impede major renovation activity within the sector. “I think many that would be doing renovations now are putting them on hold to see what the next six to 12 months bring to us,” says Beth Steele, director of marketing and product development for Six Degrees Flooring Surfaces, a subsidiary of Roppe. “Some areas around the country are still moving strong, but others are beginning to see a decline.”
Yet, rising rents could push some property owners to renovate in order to cash in. Torcivia says the median monthly rental price was up 12% over 2020 at last year’s end, to just over $1,800. “Rents are still high, and when that happens, [property owners] are incentivized to upgrade to capitalize on higher rent,” says Shaw Industries vice president of multifamily Matt Walker.
“Projections tell us that we’re going to see a pretty strong renovation model for next year,” says Sheehan.
While Torcivia says there’s the potential for a global recession toward the middle of next year, Engineered Floors vice president of builder and multifamily sales Tracy Wyrick notes, “Multifamily traditionally fares well in economic downturns, and there is still pent-up demand and shortages of places to live, so we are optimistic about the business.”
As Walker points out, “People are always going to move out of apartments. [Apartment turns are] unaffected by just about everything. Multifamily is a very consistent engine of opportunity for us, both on new construction and on the turns.”
While Dolfi says apartments make up the majority of the multifamily market, other models are trending as well. “It’s also reaching into some unique components, such as build-to-rent and single-for-rent, whereby some of the new generation is interested in renting, but not necessarily an apartment,” says Butterfield. “They might want a yard for the dog or just a little more privacy.” Dolfi says this model has gone from practically nothing to a sizable percent of units.
Also trending is mixed-use developments combining live, work and play options. “The mixed-use component is critically important to many markets,” Rakar says. “Living in place and the simplicity of having everything from groceries, restaurants, shopping and office space within walking distance to your front door is becoming more and more desirable.”
Both models offer upgrade opportunities for the industry in line with the typical builder market. “They are putting in nicer products in the whole facility,” Dolfi says of mixed-use properties, explaining that the typical mix of “for sale” garden homes and rental units often pushes up the level of finishes even on the multifamily side, while the single-family side offers basic customization packages. Though he notes, “‘Nicer’ is at the bottom end of price points.”
PRICE POINTS AND PRODUCT SELECTIONS
Walker likens the multifamily market to a math equation: “One of the fundamentals of multifamily housing is that every dollar an apartment owner puts into their apartments has to correlate to a certain amount of return on investment or rent they can achieve. I think if you were looking at the multifamily business from a 30,000-foot view, you would probably be looking at everything in there being commodity. Once you get closer to the property owners, there is a bit of nuance.”
Whether an apartment building is being developed to be sold outright or held and operated for some amount of time plays a big role in the level of finishes selected. “If a developer is building to sell, typically they’ll use commodity-type products, and if they’re building to rent-in which case it typically takes three to five years before they sell-they understand typical lifecycles and value durable goods,” Butterfield explains.
Still, Dolfi, Walker and Wyrick say the low end comprises, as Wyrick puts it, “the vast majority” of the overall market.
“They still want it to perform and have some aesthetic appeal, but it’s really about the price,” Dolfi says. “Maybe about 15% are putting in higher quality finishes and trying to get more for rent,” though he again notes, “You’re never going to get too high in the multifamily side of things. From a zero to a ten, you’re getting to a two, two-and-a-half, maybe a three in some of these products. The upgrades are pretty black-and-white in the apartment business.”
In most units, sheet vinyl and 2mm gluedown flexible LVT might step up to a floating LVT with attached pad, while 25-ounce PET might get upgraded to performance materials-which is actually happening more and more. “With renovations or new construction, carpet is going into a smaller amount of space, but the carpet is upgraded in terms of how it looks or how it performs,” Walker says, noting that soft surface is still often preferred in bedrooms even as LVT creeps into the rest of the square footage. “If they’re going to put hard surface in the living spaces and expect it to have extended life, they’re putting nylon in the bedrooms,” he explains.
Many of our sources curate their market portfolios around the higher price points and peg the overall market as a pretty even split. Though Lomas says, “I get a lot of calls: ‘Are you in this price point?’ and I have to pass, because that’s not what we’re designed to do. We don’t get into the sub-$10 per yard product; we don’t get into lower-end broadloom. We also don’t participate below 12 mil LVT. A lot of apartment turns are going to that [lower-end LVT].”
Steele estimates the mix as 60/40 in favor of 2mm products with a 6 mil to 8 mil wearlayer versus those with a 12 mil or 20 mil wearlayer, which are (also) used in common areas. “There’s a lot of upgraded material used in [amenity centers], which usually helps leverage that overall property,” Butterfield says.
Our sources agree that multifamily development is happening everywhere and at every price point. “On the commercial side of the multifamily business, we mostly see specified projects,” says Daniel Collins, vice president of commercial soft surface and innovation for Shaw. “For these types of projects, our customers will typically use products that provide additional performance benefits. For example, architects and designers will source products that add acoustic performance and meet IIC ratings without the need of additional sound matting materials. These types of products are usually more expensive but will provide consistent cost-saving results.”
With inflation pushing up price points, Karndean director of marketing Jenne Ross says, “We are seeing customers making product changes to stay within budget, stemming from both inflation and instability within the global supply chain.” However, she notes that most of the company’s market volume still comes from its 20 mil gluedown products, despite its 12 mil products’ popularity, likely an indication of Karndean’s place in the market. The company does not offer sub-12 mil products.
As one of the last things to get installed in new builds, flooring is typically one of the first things to get cut when budgets get stretched. And with multifamily timelines routinely lasting up to 24 months, a lot can change in the interim. Products go out of stock or get discontinued; budgets get hit with unforeseen costs. “Value engineering is nothing new,” says Steele, who says she gets a lot of last-minute calls due to her company’s ability to customize products and its shorter lead times as a domestic manufacturer.
However, with inflation impacting almost every single line item, bottom lines are being threatened beyond the norm. “I think the specifiers understand that everything has gone up, so they’re trying to get the owners and developers to understand that to get products like they were using pre-Covid, they’re going to have to spend more money,” Lomas says, though he notes that for budgets set prior to the pandemic, that’s a much harder negotiation. “As people are planning now for the future, I think it’s clear they’re going to have to spend more money to get the same quality product. There’s been a 30% jump in pricing from 2019 to 2022, depending on who you ask. Are they willing to spend 30% more? No. But, are they willing to spend 10% to 15% more? Probably, because they realize they have to.”
With so much already at the low end, there is some concern for how this might play out, especially as manufacturers and suppliers are, in some cases, overstocked now.
LVT VS. OTHER MATERIALS
Carpet still reigns in the multifamily market, according to Market Insights, though LVT is working its way into more spaces in both common areas and the units themselves. “LVT gives you that warmth of wood and that aesthetic without the higher cost and without having multiple maintenance procedures,” Steele says. “It’s a very good option that offers a lot of flexibility in design and price point. That’s why I think you’re seeing it used so much in apartments, even lower-end apartments that might’ve had VCT back in the day. The cost difference is much smaller than it once was, and it’s a much nicer visual.”
LVT also offers ease of maintenance and replacement compared to carpet, especially in the case of looselay and, to a degree, SPC. “I do think a lot of developers are using LVT as something a bit more cost effective, because from a replacement standpoint, if you choose LVT over carpet, you’re less likely to have to replace it with every tenant turn,” Steele adds, noting that single planks can typically be replaced without the need for a complete redo unless cheaper gluedown products are used.
“In an internal case study, one of our customers reported replacing carpet every 18 months prior to switching to Karndean luxury vinyl ten years ago,” Ross says. “While they keep a small amount of stock of the LVT for repairs, the client has not had to replace the flooring since making the switch.”
Low-end carpet is likely to be replaced as each tenant moves out, especially if the unit welcomed pets, while Dolfi and Walker estimate that performance carpet will last three years in such environments. Wyrick notes that Engineered Floors’ PureColor solution-dyed PET can be cleaned with bleach and “virtually will not stain or fade,” and also offers affordability.
Aside from vinyl sheet, which has historically been relegated to laundry areas, kitchens and bathrooms-though it too is losing ground to LVT-“carpet will still be the least expensive flooring to put down,” Dolfi says, adding, “You could maybe replace carpet three times before you reach SPC’s price.” And he and Walker estimate that cycle to align with the general replacement rate.
Dugan points out that while LVT is more durable, other factors come into play when deciding whether to replace it. “LVT’s market size continues to grow at rates that will offset any turns advantage,” he says, explaining that “factors like consolidation, design and new technology will act as catalysts to the multifamily turns.”
Still, LVT’s durability, ease of maintenance and waterproof nature, coupled with its heightened aesthetic, make it an appealing option for multifamily environments, which are subjected to a lot of wear and tear. “Some of them are trying to use LVT throughout the entire unit, period,” Lomas says.
Historically a product of choice for bathrooms due to its own inherent performance, ceramic is also giving way to LVT, which may be selected in a stone look to maintain a similar aesthetic and differentiate the space without adding a new material and, therefore, maintenance regimen, Steele says. “Where budgetary properties are being produced, we’re seeing more fiberglass bath surrounds as opposed to tile, and in some cases, we’re seeing more waterproof-oriented resilient as opposed to tile,” says Butterfield.
Shaw recently debuted its first resilient shower wall system. “It can really take a shower installation process with tile and grout down to a few hours,” Walker says of the 12”x24” interlocking tiles, citing the installation hurdles, cost and maintenance associated with ceramic. “You never have to worry about mildew and mold,” he adds. “It’s growing up quick in our single-family business…and you’re going to start seeing it in multifamily.”
In common areas, ceramic and other higher-end materials have maintained more of their position. “For multifamily living, developers are prioritizing amenity spaces to appeal to the current market trends while balancing a timeless design with high-performing options,” says Christi Hitch, vice president of business development for Bentley. While she notes that commercial-grade LVT does have a place, so, too, do ceramic, commercial broadloom and carpet tile. “In a multifamily project, the amenity space is all about first impressions,” Rakar explains.
The “wow” factor extends beyond the front door. “With community spaces becoming more important, we are seeing artificial turf, porcelain pavers, non-slip tile, or a combination of different surfaces for exterior spaces,” says Dugan.
Like LVT, carpet tile can be easily replaced and offers durability along with a warm visual. It also hides stains and soils well and provides sound dampening. Lomas says it is often used in amenity areas and corridors, especially since all of Milliken’s carpet tile has a cushionback, enhancing not only comfort and acoustics, but also the product’s life.
With corridors heavily trafficked, LVT is being utilized for its durability, but broadloom and carpet tile also play in these spaces thanks to their acoustic qualities. “We’ve seen a resurgence of broadloom [across multifamily],” Brown says, noting that all of Bentley’s broadloom designs come in six- and 12-foot rolls as well as modular tile. “When people understand they can get modular tiles but get the same aesthetic for hallways or common areas, it makes a difference to them.”
With the transition to hard surface comes the challenge of sound transference, something carpet inherently protects against. “Within the actual living spaces, we are still seeing some apartments install carpet throughout entire units thanks to carpet’s superior acoustic qualities and comfort underfoot,” Collins says. “However, we have also seen a trend of carpet moving to bedroom spaces only and LVT taking over the rest of the space. This provides an increased level of durability in the high-traffic areas and improved acoustics in the sleeping areas.”
Walker says noise complaints are a leading cause of move-outs, after rent escalation and job relocation. While new builds can incorporate more permanent sound deadening tools like sound mats and acoustical drywall, renovations and apartment turns are more limited, making carpet the best option in that regard. “Many residents are complaining about noise,” says Wyrick. “Sound abatement can be costly, and flooring is only one small component of the overall IIC/STC sound issues. Carpet and pad drastically reduce the sound issues, and at a lower cost. More developers are now looking at carpet for the bedrooms to lower costs and for better acoustics.”
With a lack of universal codes governing noise transference and a variety of subfloor types and other environmental factors impacting sound abatement, coming up with the right hard surface recipe to meet different properties’ standards can be a challenge, Sheehan says. And running qualified sound tests can quickly add up at $5,000+ per test.
Shaw has partnered with acoustical consulting firm Veneklasen to offer a free Sound Advisor app that allows users to select from typical infrastructure designs and virtually try out flooring products to gauge their general acoustical performance in different environments. “If you’re going to put hard surface products on the upper floors, you have to make informed decisions about acoustics,” says Walker.
While 2mm gluedown is fine for ground floors, upper floors need some kind of underlayment, whether attached or otherwise. This incurs added cost and, in cases where pad is not attached, impacts installation times. “With resilient and hard surface products, it is about managing expectations on acoustics and sound transference,” says Steele. “Carpet is always going to have superior acoustics unless the end user wants to invest in the proper sound control underlayment systems. I’m not seeing people spending more money; I’m not getting that request,” she continues, adding that there can also be pushback from installers. And unless properly adhered, such underlayments can lead to failures.
“Within units, we don’t see a trend based on a particular product construction,” Ross says, “but some specifiers turn to looselay or rigid core products for their enhanced acoustic qualities. We tend to see more of our looselay and rigid core products used in upper levels of multi-story applications for their acoustic qualities.”
All of MSI’s LVT comes with an acoustics-limiting pad, says Dugan, and the company recently debuted its hybrid rigid core LVT that comes with a pad that’s twice as thick as MSI’s standard LVT line. And Shaw is set to release its Soft Silence pad, which Walker says will “significantly improve” upon the performance of what’s currently available in the market.
“LVT just continues to grow, so there’s a lot of conversation around acoustics and LVT in multifamily,” Brown says, noting that Bentley offers optional cushionback for its 5mm LVT but not its 2mm-the less popular of the two.
Built to serve a lot of different masters, multifamily design unsurprisingly tends to lean toward neutral looks while favoring aesthetics popular in single-family homes. Currently, that means beiges and greiges. However, there is still some room for design, especially at higher price points and within common areas. “For high-end multifamily projects, we see the A&D community gravitate toward products that help create an experience or culture in a space,” Collins says. “These projects often reflect local nuances or an experience specific to the building or group’s brand. This is especially evident in the public, shared space of multifamily buildings.”
Meanwhile, living areas in multifamily units have pushed Bentley to create a new product that bucks the general trend toward wider plank sizes in hard surface products. “Smaller room sizes…created a demand for more-narrow plank sizes for a design aesthetic,” says senior vice president and chief commercial officer Richard French. “Bentley created the Ground Rules collection to meet this need for narrower planks with outstanding visuals of wood grains.”
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