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  • Writer's pictureZach Gendron

What The Pullback in Multifamily Construction Starts Means for Investors (September 2023 Insights)

According to the National Multifamily Housing Council, the U.S. needs to build 4.3 million more apartments by 2035 to meet the demand for rental housing. This includes 600,000 units (total) to fill the shortage from underbuilding after the 2008 financial crisis.

Just over one million apartment units are now under construction across the U.S. However, in 2023, apartment developers are estimating that they will start building half as many apartments as they did in 2021 or 2022.

This dramatic pullback in multifamily construction starts is an important leading indicator for investors and could help drive performance over the next several years.

Why Is Multifamily Construction Slowing Down?

The main reason for the slowdown in apartment construction in 2023 is that developers have less access to development capital. The largest banks are allocating less money to real estate, and some smaller banks have changed their lending strategies after a few regional lenders failed.

In addition, the financials for new projects are not as good as they used to be because rent growth has slowed down and operational expenses, especially insurance, have increased.

Why Does This Matter for Multifamily Investors?

Given that it typically takes 18 to 24 months to complete a new apartment community, the number of new apartment units being delivered is expected to start declining in early 2025 and then drop significantly in the second half of the year.

Based on this trend, rent growth is expected to pick up in spring 2024 as the seasonal upturn in leasing velocity (the number of apartments leased per month) coincides with the signs that the current excess of new supply is temporary. Rent growth should then continue to accelerate faster into 2025.

Which Markets Are Positioned to Benefit?

The locations with the most pronounced cooling in apartment construction starts are located in Texas. Compared to typical starts in early 2021 to early 2023, the number of units breaking ground in 2023’s second quarter fell 79 percent in Houston, 74 percent in Austin and 67 percent in Dallas-Fort Worth.

This is surprising seeing as the Lone Star State’s key markets are still leaders for job production and apartment demand. In particular, Dallas-Fort Worth is the nation’s top spot for job additions by a sizable margin.

Other markets that are positioned well based on this slowdown are:

  • Nashville: down 44%

  • Phoenix: down 43%

  • Miami: down 37%

  • Orlando: down 29%

  • Charlotte: down 27%

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