The multifamily housing market is experiencing a significant downturn as builders seek fewer construction permits, driven by elevated interest rates and an increasingly saturated market. According to a new report from Redfin, permits to build apartments in the United States have dropped nearly 30% since the pandemic began. Builders have obtained permits to construct just 13 multifamily housing units for every 10,000 people in the country so far this year, based on data from the U.S. Census Bureau.
Impact of High Interest Rates and Market Saturation
The challenging interest rate environment has been a major factor in the decline of construction permits. Higher borrowing costs make it more expensive for builders to finance new projects, leading many to adopt a wait-and-see approach. Additionally, the market saturation resulting from a building boom in recent years has made it difficult for property owners to find tenants. At the end of last year, only 47% of newly completed apartments were rented within three months, the lowest share since 2020, according to Redfin.
Supply and Demand Dynamics
Despite the significant slowdown in new permits, the number of units being completed remains at historic highs as projects started during the pandemic are now coming to fruition. This has created a backlog of new units, leading property owners to compete fiercely to rent out their available spaces. Consequently, this competition has put downward pressure on rents. While asking rates surged by 18% during the pandemic, they have risen by only 1% in the past year. Nonetheless, asking rents are still at their highest level since 2022.
"Prospective renters should be aware that now may be a better time to sign a lease than later," advised Sheharyar Bokhari, Redfin's senior economist. "Property owners might start jacking up rents again once all of the new apartments hitting the market fill up with tenants and there's no longer so much supply, which could be the case in a year or two."
Regional Variations in Permitting Activity
Interestingly, some Sun Belt markets have bucked the national trend and are issuing more multifamily housing permits than anywhere else in the country. Cape Coral, Florida, leads the way with permits to construct 27 multifamily units per 10,000 people, followed by Austin, Texas, with 21; Greensboro, North Carolina, with 20; and North Port, Florida, with 18.
"Florida faces high risk from storms, flooding, and sea level rise, and is the epicenter of the housing insurance crisis," the report noted. "But builders keep building because there's still demand — partly due to the influx of out-of-towners who moved in during the pandemic. Permits may also be rising in Florida as homeowners continue to rebuild after Hurricane Ian in late 2022."
Areas with Minimal Permitting Activity
Conversely, some metropolitan areas need more permitting activity. Stockton and Bakersfield in California have yet to issue multifamily permits in the first five months of 2024. Similarly, Providence, Rhode Island, has also had no new multifamily building permits issued this year. Other cities with only one new multifamily building permit issued so far this year include El Paso, Texas; Baton Rouge, Louisiana; Cleveland; Fresno, California; Detroit; Dayton, Ohio; and New Orleans.
Future Outlook
The current slowdown in multifamily construction permits signals potential challenges for the housing market in the coming years. As the supply of new apartments dwindles, prospective renters might face higher rates once the existing backlog of units is absorbed. However, the trend of builders pulling back on new projects might also indicate a market correction as developers wait for more favorable economic conditions.
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