Main Takeaway: Although the pipeline of multifamily units coming online over the next 2 years is at a record level, starts are dropping off due to higher interest rates and economic headwinds. Despite the ample supply coming to market, don’t expect a significant rent drop or increase in vacancy rates due to strong demand.
Story: According to a research brief by CBRE, more than 716,000 multifamily housing units will hit the market over the next 24 months. The sector’s vacancy rate will increase above the current 4.6% equilibrium vacancy rate to 5.2% by this year’s end, according to CBRE.
This construction pipeline is expected to expand the total multifamily inventory by 4.2%. This will increase vacancies and significantly slow rent growth. CBRE forecasts rent growth to slow this year to 3.5%, down from 6.7% in 2022 and 13.4% in 2021. Despite the rapid rise in forthcoming multifamily assets, 200,000 more units a year are needed to keep supply and demand in balance.
Source: Realtor.com
Berkadia recently released its February Apartment Construction Timelines report showing that before the pandemic, the average construction time for multifamily ranged from 16 to 23 months. As of Q1 2023, the average timeline for construction is between 23 and 32 months, and those timelines will remain elevated.
Further, as home prices and interest rates remain stubbornly elevated, more consumers will move from shopping in the single-family market to multifamily rentals.
This has dramatically increased multifamily starts, which have reached the highest levels recorded since the mid-1980s. The urban metros with the highest rates of construction include:
Despite this full pipeline, Bisnow reports that the more prominent REITs are seeing a significant slowdown in starts due to rising interest rates and fears around the banking system.
Indeed, according to Bloomberg, multifamily starts dropped 5.9% in March, with applications to build dropping 8.8% to an annualized rate of 1.41 million units.
As permitting falls, so too do available construction jobs in the sector. According to NAHB, “The construction labor market saw a decline for job openings in March as job openings in the sector trend lower. The count of open construction jobs decreased from a revised reading of 404,000 in February to 341,000 in March. This came after a data series high of 488,000 in December 2022. The overall trend is one of cooling for open construction sector jobs as the housing market slows and backlog is reduced, with a notable uptick in month-to-month volatility.”
Expert Take on Multifamily Construction
“The small dip in housing starts is mostly due to a slowdown in apartment building, which had been booming over the last few months. After a red-hot building streak, apartment builders are cooling off as new units hit the market. Rent inflation is also slowing, signaling that consumers have more options on the supply side.” — Aarthi Swaminathan, MarketWatch
