Originally posted by Costar on October 18, 2023
Reduced Rental Housing Construction Could Accelerate Rent Growth and Reignite Inflation
A national multifamily developer with just over 6,000 units in its pipeline recently admitted that the company has been able to start work on only one of the projects so far this year.
The missed construction starts is not surprising given the interrelated set of obstacles developers are facing, topped by the lack of available construction financing attributed to the spike in interest rates and a noticeable reduction in construction lending by numerous banks, along with an inability to secure government approvals for new projects.
The combination of those and other factors essentially tripped the “circuit breaker” for the financing mechanisms that power multifamily development. As a result, we've seen a significant decline in new multifamily construction this year, marking a sharp contrast to the historically elevated level of groundbreakings that occurred in 2022.
The failures of Silicon Valley Bank and Signature Bank had an immediate chilling effect on commercial real estate lending activity across the board. Obtaining loans for acquiring and developing land has become even more challenging as financial markets have been strained by the bank closings. A recent survey conducted by the National Association of Home Builders confirmed this trend, finding that credit availability has been severely impacted because of ongoing stress within financial markets.
The just-released Quarterly Survey of Apartment Construction & Development Activity report from the National Multifamily Housing Council backs up the NAHB’s findings. The activity report found an alarming 88% of developers reported experiencing construction delays over the past three months. The most common causes cited for these delays were related to financing, permitting, entitlement and professional services, as well as project feasibility and economic uncertainty.
The largest factor was “Lack of Availability of Construction Financing,” a response in the survey that jumped from 35% a year ago to 78% today, the highest percentage response of all choices. The next highest response, at 74%, was listed as the inability to get permits and entitlements.
A slowdown in construction starts today may not be a cause for concern in markets that have recently had the fastest rate of inventory expansion in the face of weakening demand. Miami, Austin in Texas; and Nashville in Tennessee, for example, are leaders for having the highest ratio of units under construction to inventory. All three markets range between 15% and 17% compared to the national average of 5.3%. These locations will need some time to absorb their pending oversupply and bring supply-and-demand conditions back toward equilibrium.
However, the multifamily sector’s current slowdown in construction activity could also set the stage for rent increases in the future at the national level should supply be throttled back too severely.
A mid-rise apartment building, currently the most popular building type for developers, takes almost two years to complete, meaning every unit not started today is a unit not available to lease 24 months from now. The current oversupply is likely to be absorbed by then, but unless financing conditions improve in 2024, which seems unlikely, the multifamily market could swing back to a condition of undersupply, and see accelerating rent growth and lower housing affordability, return in 2026.
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