Multifamily Developers Need to Rethink Their Supply-Side Risk

Article originally posted on Globe St. on April 5, 2023

Projects Not Yet Completed Lead to Debate About Absorption Rates and Risks.

Over the last three years, Covid-19 extended the timeline for residential and commercial real estate projects to be completed–and its aftereffects continue to slow momentum. The multifamily housing category has been no exception.

Part of the reason for the slowdown has been a shortage of workers; another, the shortage of materials. And though such pandemic challenges have waned, they’re far from over. This is now causing a shift in thinking that it may take longer for new housing to be completed and absorbed and at different rates depending on individual real estate market trends, according to a recent report from Cushman & Wakefield.

The U.S. Census Bureau reported that 926,000 units were under construction at the end of last year, higher than at any time since at least 1970. That’s also twice as many as the number that preceded the Great Recession. Nearly 60% of markets have more than three years of supply underway, leading to more projects being delivered in the near term, even if not immediately. Before they undertake more construction, developers might weigh how much more inventory is needed in their area given the numbers and the possibility of a recession, a widely debated topic.

To keep pace and avoid an under- or oversupply, multifamily developers might also scrutinize their construction risks both in the short- and long-term and weigh what types of buildings to undertake. Once popular garden-style apartment buildings are constructed less often than the now more sought after mid- and high-rise buildings, which take longer to complete. In fact, the National Association of Home Builders (NAHB) found the average time to finish an apartment building has increased by 5.5 months between 2013 and 2021.

What further extends these timelines are delays for permits, shortage of materials, availability of labor and financing needs. One report from the National Multifamily Housing Council’s (NMHC) Quarterly Survey of Apartment Construction & Development Activity found that only 13% of respondents reported facing no construction delays last December. Construction prices also increased for supplies–except lumber, which extended lead times between construction starts and completion. And construction financing rose too as interest rates did and 70% of senior loan officers stated they were tightening lending standards for construction and development loans.

One result may be completions of projects underway peaking this year, then deliveries declining over the next few years. But that could change if deliveries are delayed for all the previously stated reasons, plus undercapitalization.

Because real estate has become so much more local, each market needs to be separately focused on for the most accurate picture on its housing starts, completed buildings and housing shortages. For example, cities like Nashville and Charlotte in the South and Denver in the West will face mounting supply-side pressure in coming years whereas Indianapolis, Sacramento and Cleveland anticipate smaller construction surges. And even in each city, supply and demand may vary. Nashville, for instance, has seen much more construction downtown than other areas with smaller pipelines.

One overall trend worth noting is a shared anticipation toward normalization over the next few years.