New Household Formation Spurred The Biggest Year For Multifamily Development In 36 Years

Americans created 2.8 million new households between 2020 and 2022 as they emerged from pandemic lockdowns, adding pressure to an overburdened housing market and aiding in the creation of a record number of new apartment units.

The number of households across the U.S. reached 131.2 million as of November 2022, Census Bureau data showed, up from 128.4 million in 2020, and multifamily developers in particular have pushed to meet the need, especially in secondary markets. 

Overall, U.S. multifamily development has reached nearly unprecedented levels. About 529,000 apartment units were started nationwide in 2022, the most in 36 years, according to Census Bureau data. 

“We expect hybrid work arrangements to continue to allow people to shift further from work in some cases,” said Norm Miller, Ernest Hahn chair and professor emeritus of real estate at the University of San Diego. “This helps secondary markets and bedroom communities — satellites, if you will — grow relatively faster.” 

In metro Los Angeles, multifamily permitting during the first two months of 2023 was roughly the same as it had been during the first two months of 2022, according to Census Bureau data. In the San Bernardino, California, area, by contrast, permitting more than tripled in the same period.

Development in San Francisco cratered by 78% in early 2023 compared with the year before, but metro Sacramento has also more than tripled its multifamily building permits.

Metro New York is experiencing a similar dynamic, with its multifamily permitting down 38% during the first two months of 2023 compared with the same period in 2022. Meanwhile, the Bridgeport, Connecticut, area saw permitting spike from only 75 units to 638 units. While hardly a cheap market, suburban Connecticut is more affordable than much of New York City.

Remote work has resulted in lower housing demand in some of the most expensive markets in the country, such as New York City and San Francisco, as some residents opt for less expensive places to live, according to a report by the Economic Innovation Group.

The long-term impact of remote work on multifamily demand isn't clear yet, since there is disagreement on the staying power of remote work. Still, National Multifamily Housing Council Vice President of Research Caitlin Sugrue Walter said it is undeniable that for some, the arrangement will be permanent.

“It can definitely serve as a potential demand opportunity for some smaller, more affordable metros, although those metros will need to make sure they stay on top of their migration patterns so that affordability concerns don’t arise,” Sugrue Walter said.

“More remote work could increase household formation by giving people greater ability to live in less expensive areas farther from the workplace where they could afford to live alone or with partners rather than with parents or roommates," said Daniel McCue, a senior research associate at the Harvard Joint Center for Housing Studies.

However, household formation growth trends predate the pandemic. As they have gotten older, millennials have eased into the driver's seat when it comes to U.S. household formation. The number of older adult households is still growing, but over the last five years, household growth among younger adults has accelerated rapidly.

Each year from 2016 to 2021, the number of households headed by 25- to 34-year-olds was up by 300,000, a sharp rise from the average annual increase of 45,000 households from 2011 to 2016, according to Census Bureau data.

Growth in the number of households headed by 35- to 44-year-olds experienced an even more robust turnaround, up 400,000 each year from 2016 to 2021. 

Such a pickup in growth in this age group can't be explained by growth in the underlying population alone and suggests older millennials were now forming the households that had been delayed earlier in the decade, according to Harvard's McCue.

Rather than impede household formation, the aftermath of the worst of the pandemic seems to have given that metric a boost for various reasons, McCue said, mostly coming down to money. Wages were up 4.9% in 2021, and the U.S. unemployment rate fell from 6.7% at the end of 2020 to 3.9% at the end of 2021. The federal government also distributed three rounds of stimulus payments in reaction to the pandemic.

Residential development has increased in recent years in response to demand, but not enough to satisfy demand as the number of households increases. In their U.S. Apartment Demand Through 2035 report, the NMHC and the National Apartment Association found that the U.S. will need another 4.3 million apartment units by 2035 to keep up with projected demand, even as there will be a 3.8% increase in the homeownership rate by then.