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  • Writer's pictureRealFacts Editorial Team

Apartment starts plummet 52%


apartments

The multifamily housing market is experiencing a significant downturn in new apartment starts, according to recent data from HUD and the U.S. Census Bureau. The report reveals a staggering 51.7% year-over-year decline in starts for buildings with five or more units, bringing the seasonally adjusted rate to just 278,000 in May. This sharp drop raises questions and creates opportunities for investors.


A Market in Decline


The overall housing market is feeling the strain, with total housing starts falling to a seasonally adjusted annual rate of 1.3 million in May, marking a 19.3% year-over-year decline. Single-family home construction also saw a slight dip, with a 1.7% decrease to 982,000 units. However, it's the multifamily sector that is particularly noteworthy. Developers pulled permits for 382,000 new apartments in buildings with five units or more, a significant 31.4% year-over-year drop. Furthermore, the number of units under construction at the end of May was 898,000, representing an 8.6% decrease from the previous year.


A Silver Lining for Developers and Investors


Despite the downturn, there is a silver lining. Multifamily developers managed to complete 479,000 apartments in buildings with five or more units, a slight 0.8% year-over-year increase. This new supply can be a boon for developers, managers, and owners. As more projects come online, the increased availability of contractors may lead to lower construction costs for those still in the market to build.


David Cocanougher, president of the multifamily division at Dallas-based Leon Capital Group, notes a shift in the dynamic between developers and subcontractors. "We’re also seeing some of the subcontractors come back to actively pursue work," he says. "Usually, we’re chasing them, and now they’re looking for opportunities."


Opportunities for Management Firms and Ownership Groups


New properties entering the market present valuable opportunities for management firms, which can expand their portfolios and generate new business. For ownership groups, the current environment offers attractive buying opportunities, especially for new constructions that are still in the lease-up phase.


Austin, Texas-based Palladius Capital Management exemplifies this trend. The firm recently acquired two new construction properties in lease-up, taking on the associated risks but benefiting from favorable pricing. "We’re taking on the lease-up risk, but it was such an attractive basis below replacement cost," says Palladius CEO Nitin Chexal. He emphasizes the long-term view, suggesting that while the market may face a supply overhang for 12 to 18 months, rents are likely to increase once this period passes.


Investor Takeaway


For investors, the current downturn in apartment starts presents a dual-edged sword. While the market faces short-term challenges, those with a medium- to long-term perspective can find significant opportunities. Lower construction costs, increased contractor availability, and attractive acquisition prices for new properties can all benefit investors willing to navigate the current uncertainties.

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