A Changing Skyline: Multifamily Construction Faces Mixed Signals Amid Market Shifts
The multifamily housing market is navigating a landscape of contrasting indicators, as a wave of apartment completions surged 61% year-over-year in October 2024, even as starts for new developments continue to decline. This dichotomy underscores a cooling development climate, exacerbated by rising costs and cautious investor sentiment, while some players find opportunities to expand.
A Surging Finish Line, A Faltering Start
October saw an annualized 615,000 apartment completions for buildings with five or more units — a 61.4% jump from the same month last year. Yet, starts for similar buildings fell to a seasonally adjusted rate of 326,000 units, a dramatic 12.6% year-over-year decline and the lowest level since 2013. While starts rose 9.8% from September, they are still far below historical norms, reflecting developers’ hesitancy to commit to new projects amidst a murky economic backdrop.
At the end of October, 804,000 units were under construction, representing a 19.2% year-over-year decrease and a 3.5% dip from September. The gap between starts and completions has now reached its widest level since 1974, according to Jay Parsons, head of investment strategy at Madera Residential.
“The numbers tell a story of a market in transition,” Parsons remarked in a LinkedIn post. “While completions remain robust, the dramatic drop in starts signals a significant shift in developer activity.”
The Broader Housing Picture
The multifamily sector’s struggles are a marked contrast to the relatively stable single-family market. Single-family housing starts fell only 0.5% year-over-year to 970,000 units, with a sharper month-over-month decline of 6.9%. Overall housing starts dipped 4% annually to a seasonally adjusted rate of 1.3 million, down 3.1% from September.
Multifamily developers also pulled fewer permits in October. Seasonally adjusted permits for buildings with five or more units dropped to 393,000, a 20.9% year-over-year decline. Permits fell 3% from the previous month, signaling continued caution in the pipeline of new projects.
Why the Hesitation?
Several factors are influencing the slowdown in multifamily starts. Elevated interest rates have significantly increased financing costs, making it more challenging for private developers to launch new projects. Additionally, construction costs remain stubbornly high, squeezing already thin margins and deterring speculative building.
Despite these headwinds, demand for multifamily housing remains strong in many markets, fueled by rising rents and a robust labor market. Developers who can navigate these challenges — particularly those with a competitive cost of capital — are positioning themselves to fill the gap left by cautious private players.
Opportunity Amid Uncertainty
While private developers are pulling back, some apartment real estate investment trusts (REITs) see an opportunity to gain market share. Arlington, Virginia-based AvalonBay Communities (AVB) has maintained an optimistic outlook, leveraging its financing advantage to press forward with new projects.
“We’ve got a cost of capital advantage relative to our private sector competitors,” said Ben Schall, AvalonBay’s CEO, during the company’s Q3 earnings call.
AvalonBay started four new projects in the third quarter — two in North Carolina and two in Texas — and is eyeing more in 2025. Matthew Birenbaum, the company’s chief investment officer, projected an increase in project activity, estimating next year’s start volume could reach $1.5 billion, up from $1.050 billion this year.
This confidence among well-capitalized REITs contrasts sharply with private developers’ cautious approach, underscoring the disparity in resources and risk tolerance across the sector.
What Lies Ahead?
The multifamily construction market is entering uncharted territory. As more units are completed, the cooling pipeline starts to raise questions about the future balance of supply and demand. With 804,000 units still under construction, the market remains flush with near-term supply. However, if starts continue to lag, the sector could face a supply crunch in the coming years, potentially fueling rent increases in key markets.
For now, multifamily developers are grappling with a mixed bag of challenges and opportunities. The wide gulf between completions and starts illustrates a market grappling with uncertainty. Those with the resources and foresight to weather the storm — and even expand — could emerge stronger, reshaping the industry for years to come.
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