Main Takeaway: Builders are hurting. That said, there has been a recent surge in multifamily construction starts with an equally dramatic drop in permitting. This signals a future slowdown in apartment construction.
Story: As housing prices and debt costs continue to increase, demand for rental units has remained robust. That said, according to new reports, the construction industry is still dealing with supply chain issues as it catches up from the pandemic lockdowns and material disruptions.
Here are a few of the major trends multifamily investors and owners need to pay attention to as we enter a potentially difficult period for the economy as well as real estate.
Starts & Permits
Multifamily construction starts jumped a whopping 28.6% in August, to an annual rate of 621,000. This is the highest level since 1986. Further, according to NAHB “there are currently 890,000 apartments under construction (2+ unit properties), up 27% from a year ago with this number continuing to rise.” This is the highest level since 1974.
That said, the number of permits dropped significantly in August, down 18.5%, which means although lagging, we will certainly see future multifamily construction slow. In commenting on this, Doug Duncan, the chief economist at Fannie Mae, notes: “We view the increase in starts in August as a result of the volatility of multifamily data…More concerning is the decline in permits.”
Authorized (but not started) multifamily projects in August were 143,000 units, slightly less than the record set in July this year (147,000). This shows that builders are still cautious, likely as a result of labor and material shortage fears. Rising rates will only exacerbate this slowdown as construction debt becomes more expensive.
Apartment Building Costs
Are a lot more expensive today than in the past. According to new data from NAHB, building lots now sit at an average cost of $55,000, up from $43,000 in 2005-2006. Adjusted for inflation, that is priced relatively similarly, but that’s just the average. Lot prices across the country are not evenly distributed.
That said, a new report from John Burns Consulting suggests that building costs may trend lower amidst slower activity and softening buyer demand. “[B]uilding material demand will almost certainly decline next year at the same time that supply is finally catching up to demand…The results should be stabilization of building materials prices and labor availability, at least in the trades involved in new home and remodeling construction.”
Apartment Builder Confidence
According to the NAHB/Wells Fargo Housing Market Index (HMI), builder confidence fell 3 points for the ninth consecutive month. The HMI now sits at 46, its lowest level since 2014, with the exception of Spring 2020. Further, the report indicates that “24% of builders reported reducing home prices, up from 19% last month.”
Apartment Construction: Let’s Go Downtown
A report from StorageCafe indicates that over the last decade there has been a resurgence of apartment construction in central urban neighborhoods, particularly in southern markets.
The data looked at the 100 biggest cities and ranked them by multifamily units delivered over the last decade, and 391K downtown apartments were built from 2013 to today representing 37% of the total inventory of multifamily units in those neighborhoods. That is, “37% of the total stock of downtown apartments, which would hold a disproportionately large percentage of the population, has been built within the last ten years.”
New Apartment Construction Expert Take
“Builder sentiment, as measured by the NAHB/Wells Fargo Housing Market Index (HMI), has declined for the last eight months, falling to its lowest reading since 2014. The decline of the HMO reflects weakening market conditions for home builders, including current sales conditions and buyer traffic. The fall in sentiment also indicates that single-family construction will continue to decline in the coming quarter.” — Robert Dietz, NAHB chief economist