“The one million apartment units under construction may not make a significant dent in the nation’s housing needs.”
For the past three years the multifamily sector has experienced a construction boom not seen since the 1970s, which has helped lead to the current moderation of rents.
However that may be about to change.
According to a new report by Greg Willett of Institutional Property Advisors, rents could resume an upward path by spring 2024, with “robust” increases in 2025.
A slowdown in early stage multifamily building showed up in 2Q 2023, with starts in key markets falling slightly. This was largely attributable to less access to development capital, Willett reported. The largest banks were holding back on real estate lending, while smaller banks shied away after the failure of regional lenders earlier in the year. In addition to the low rate of rent growth, capital sources were worried by rising operational expenses, especially insurance costs, that “soared above past norms.”
While more than one million apartment units are currently under construction in the U.S., they may not make a significant dent in the nation’s housing needs. About half the total construction pipeline is in 15 markets only, with 30,800 units being built. “That start volume is off 52% from the quarterly norm of 64,200 that was sustained for nine quarters from early 2021 through early 2023,” Willett noted. “Absolute peak quarterly starts totaled 81,500 units from April through June 2022.”
He anticipated that rent growth would begin to show up by spring 2024, “when the normal seasonal upturn in leasing velocity should coincide with obvious signs that today’s new supply excess is temporary” to push rents higher during 2025.
The most obvious signs that apartment construction is slowing appear in Texas. Starts fell 79% in Houston, 74% in Austin and 64% in Dallas-Fort Worth compared to the prior two years – even though these metros continue to be leaders in job growth and apartment demand. They are therefore likely to see boosted rents.
Other likely candidates are Philadelphia, Denver and Washington, DC – all of which have seen sharply lower multifamily construction starts. More moderate declines are underway in Nashville, Phoenix, Miami, Orlando, and Charlotte. Even with the slowdowns in construction, Phoenix still ranked with Raleigh-Durham, Charlotte, and Dallas-Fort Worth at the top of the list for multifamily starts in the second quarter, each with 3,200 to 3,500 units being built.