Multifamily construction slows sharply

Article originally posted on CoStar on December 6, 2024

U.S. multifamily housing is experiencing a significant pullback in new construction, even as the number of units that began construction in the past two years is expected to reach a 40-year high.

While 675,000 units were added this year, construction starts on rental apartments, after peaking in the first quarter of 2022 at 211,000 units, have since plummeted 70% to just 65,000 units starting construction in the third quarter, reflecting a dramatic shift in market dynamics.

One of the primary drivers of this pullback in development activity is the sharp contraction in construction financing. Beginning in early 2023, banks and other lenders scaled back significantly on multifamily construction loans. Interest rates were prohibitively high for those still offering financing, making many proposed developments financially unviable.

By 2024, banks became more open to lending on new apartment projects, but equity sources for development capital retreated. In today’s pricing environment, many equity investors perceive existing multifamily properties as offering more attractive returns than risky new developments.

U.S. multifamily markets grappling with oversupply conditions have seen the sharpest declines in apartment construction. Houston, for instance, saw a staggering 97% drop in construction starts, falling from 9,200 units starting construction in the first quarter of 2022 to just 300 units in the third quarter of 2024. Austin similarly saw a 76% decrease in starts over the same time, with new projects tapering from 10,000 to 2,300 units. Even traditionally strong rental markets such as Chicago, New York and Washington, D.C., which continue to post rent growth above the national average, recorded declines in construction starts ranging from 70% to 86%.

This construction slowdown highlights a broader trend: Even in markets with healthy demand, the obstacles to launching new projects remain formidable.

Meanwhile, a puzzling development has emerged in certain high-vacancy apartment markets such as Atlanta, Austin, Texas; Denver, Jacksonville, Florida; and Raleigh, North Carolina. Despite average vacancy rates ranging from 10.3% to 15.1%, these markets experienced increased apartment construction starts in the third quarter.

Denver, for example, saw new projects jump from 450 units to 1,500 units under construction during the quarter. The motivation to start building apartments now is strategic timing. Those developers are betting that a decline in new units by 2025 and 2026 will create an opportunity to capitalize on expected renter demand for new units amid reduced competition.

This strategy is fraught with risk. Oversupply remains a significant hurdle in these markets, and any surge in new projects could exacerbate the imbalance. Developers banking on favorable conditions emerging in 2026 may be squeezed by lingering supply overhang, further delaying a return to market equilibrium.