In 2024, the construction has slowed significantly. Developers and investors are navigating a landscape where new developments are becoming more challenging to justify, and the shift may offer opportunities for investors as supply tightens and demand catches up. We wanted to take some time explore the factors driving the slowdown and what it means for real estate investors.
Current Trends in Apartment Construction
Multifamily starts in 2024 are at their lowest levels since 2013, and permits for new construction are down 30% to 80% across major markets. According to CoStar, apartment completions will fall below 300,000 units by 2026, the lowest level in over a decade source.
This decline follows the post-pandemic construction boom when demand for rental units surged. However, developers now face several obstacles: rising construction costs, stagnant rent growth, and increasing interest rates. Lenders are also tightening their loan-to-cost ratios, forcing developers to raise more equity, putting additional limitations on new projects.
Investor Optimism: Could It Reverse the Slowdown?
Despite the construction slowdown, some investors see an opportunity. With fewer new apartments being built, reduced supply should help drive rents and property values in the coming years. As we've noted in previous posts, firms like KKR and Blackstone are betting on this by acquiring large apartment portfolios, anticipating future rent increases.
However, this optimism is unlikely to spur a significant increase in new construction. High building costs, combined with flat rents and rising interest rates, mean that developers will have a tougher time making new projects financially viable. As such, investors may prefer to acquire existing properties rather than risk the costs of new developments.
What Needs to Change for Construction to Rebound?
For apartment starts to rise again, several conditions need to improve. Interest rates must continue dropping, and rents need to show that they will indeed grow in the face of lower supply. Even if these changes occur, it’s doubtful that we’ll see a return to the record-high construction levels of 2021.
Affordable housing projects, often backed by tax incentives, may present an alternative for those with expertise navigating the space. Larger developers with the capacity to reduce costs could pursue these projects, while others may pivot to alternative housing types, such as condominiums, which might offer better returns in the current market source.
Further, the Biden administration has made affordable housing a priority, calling for increased federal funding and incentives for low-income rental construction. If they materialize, government subsidies could help drive more affordable housing projects, but making them financially viable remains a challenge. Without substantial support, developers are unlikely to prioritize lower-cost rentals, despite growing demand source.
Key Takeaways for Investors
The current slowdown in apartment construction presents both challenges and opportunities for real estate investors. With fewer new projects in the pipeline, competition for existing units may drive up rents and property values in the next few years.
Investors with a long-term view may find opportunities in markets where demand is expected to outpace supply once the current wave of developments is absorbed. We have that conviction in certain Midwestern and Appalachian markets and are looking forward to sharing opportunities as they arise.
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Have a great weekend!
Matt & the EHC Team
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