Limited access for development capital has led to a significant decline in multifamily building activity across the U.S., according to Institutional Property Advisors and Marcus & Millichap.
In a recent report, the firms noted that economic volatility and rising interest rates have led to more limited lending from banks both large and small, with early-stage building activity slowing during the second quarter of the year. In some areas in particular, this slowdown in apartment construction activity is more pronounced than others.
In areas where construction starts have been particularly depressed, rent growth is positioned to outperform, the report’s authors wrote. Key building centers in Texas, specifically, are likely to experience this. Houston, Austin and Dallas-Fort Worth all had groundbreaking starts fall in the second quarter of this year compared to the same period in 2021 and early 2023.
“Frankly, I was a little bit surprised that the biggest slowdowns [in construction starts] were in Texas because these economies are performing the best,” First Vice President and National Director of Research at IPA and author of the report Greg Willett told Multi-Housing News. “However, you could make the case that construction was a little bit more overheated in those markets than it was in some other places which could have led to a more notable slowdown.”
On the contrary, markets with less of a second quarter slowdown in multifamily construction starts include Miami, Orlando and Charlotte, all falling less than 40 percent compared to the same time period. Of the 15 market core areas, Raleigh-Durham and Phoenix led the pack with the most ground breakings, with Raleigh-Durham being the only market showing no signs of slowing construction activity yet.
“It’s the reverse of what I said about Texas,” said Willett. “While there was significant construction, it wasn’t as aggressive in Florida as it was in Texas or the Carolinas. It wasn’t surprising to me to see a little bit less of a pullback in Florida.”
Deliveries and rental rates
Multifamily deliveries are expected to pull back in early 2025 and significantly drop in the last half of the same year, with a little more than one million units currently under construction across the U.S. While this number is not low, not all locations are seeing equal activity. Half of those units are in 15 markets, primarily across the Sun Belt but also comprised of Philadelphia, Seattle, Los Angeles and Washington, D.C. Following the expected slowdown in the next couple of years, construction is expected to pick back up again.
“If you look at the big picture, housing is under-supplied pretty much everywhere across the country,” Willett said. “That’s going to be even more pronounced in these high-growth areas across the Sun Belt, so we would expect to see a pretty significant comeback in construction once we get past this lull that is going to last for a year or two.”
As construction starts pace downward, rent growth is expected to go up, with increases expected to become noticeable around the spring of 2024 and last into 2025.
“Whereas some of these markets are already experiencing rent cuts right now, we are expecting rent growth to go back to slightly positive next year,” Willett said.
