Many people have asked me about the plethora of new apartments in our region and if we’ve overbuilt. Most people have heard about the national and regional housing shortage, but they still wonder if we’ve overbuilt apartments and whether vacancy rates are going up.
The answer is nuanced. It is true that our region has a shortage of roughly 8,500 housing units, which includes both multifamily apartments and single-family homes. It is also true that we had an absolute boom in multifamily construction during the pandemic. A high number of permits were pulled, initiating an unprecedented number of new apartment projects.
Most projects take a minimum of two to three years to complete, so we are now facing an absorption problem with many of those apartment buildings finished, creating a glut of new product.
The other major problem, which is the bigger challenge, is that much of the new product is for high-end renters. What we have is a shortage of affordable apartments. Local rents average about $1,500 a month, and the vacancy rate is at 7.2%.
Builders and investors in multifamily projects face higher material and labor costs compared to pre-pandemic levels, higher financing costs due to higher interest rates and increasingly expensive lots. If it’s expensive to build a unit, it will be expensive to rent a unit.
The multifamily market is now adjusting with actual declines now in permits pulled and projects started. Multifamily starts in the U.S. are running nearly 50% below their year-ago pace. This is also true regionally for both single and multifamily permits.
But the conundrum is that less supply isn’t necessarily good, because we do have a structural shortage of housing. Lower supply also means more upward pressure on prices.
The U.S. median price of a new condo has increased from $450,000 in 2018 to $550,000 in 2023. But building mostly high-end housing isn’t the solution. The National Low Income Housing Coalition estimates the U.S. is short 7.3 million housing units for low-income renters. Many cities have mandates for builders to construct a certain percentage of affordable units, but that’s not enough, and waiting lists are long for prospective tenants.
Montana is experiencing an influx of homebuyers from more expensive regions. To get ahead of the affordability issue, they’ve legalized several meaningful measures like allowing accessory dwelling units on any lot with a detached home. They’ve legalized dense housing and mixed-use buildings within all commercial zones.
Montana’s new laws also allow duplexes on any residential lot. New residential construction only allows one parking space per home. They’ve accelerated the permit review process.
These may seem like radical ideas, but I’d rather get ahead of the problem before middle-class workers and their families decide not to live here.