Economic Forces Have Hit the Pause Button on Apartment Construction

Inflation and interest rates impact virtually every aspect of our lives. We have seen that firsthand as the combination has driven up costs on everything from consumer goods to borrowing.

Beyond the impact on consumers, the double whammy of higher prices and escalating interest rates has directly impacted new construction projects across the country.

Not only are contractors paying more for labor and materials, but financing costs have more than doubled in the last 18 months.

And these conditions are unlikely to change anytime soon.

What’s Happening in New Construction

Higher prices on everything from labor and materials to borrowing costs mean less deals cash flow, resulting in fewer projects starting in 2023. Here’s the challenge new construction projects face:

Labor costs are up 5.5% over 2022 due to the tight labor market. There is a shortfall of around 546,000 workers, which continues to drive up wages. To make matters worse, more workers are exiting than entering the workforce, exasperating the labor shortage in the construction industry.

The cost of materials jumped an average of 19% in 2023, with over 82% of construction materials increasing significantly since 2020. W new contr expects prices to remain elevated through 2025 due to steady demand in both labor and materials.

Due to rapidly rising interest rates, borrowing costs have more than doubled in the past two years.

The result: In the first six months of 2023, 154,366 apartment units went into service, but construction starts fell to only 100,000 during the same period—a 36% decline in supply.

The State of the Multifamily Housing Market

The housing and affordability crisis has been in the news for the last two decades. And yet, the availability of housing continues to shrink in most markets.
Not because new construction is not happening but because it is not keeping up with demand.

Currently, the US needs 4.3 million more housing units to meet demand. Any hiccup in the supply chain, like falling construction starts, means demand for multifamily housing will remain strong in most markets regardless of economic conditions.

The other challenge is the long runway for new construction projects. It takes an average of 17.2 months from conception to delivery, creating a supply bottleneck when construction starts fall.

How Rising Residential Prices Play into Demand

High-interest rates also mean fewer sellers are willing to list their homes because they would need to trade their 3 or 4% mortgage for a 7.5 to 8% mortgage. This has led to meager inventory and home prices that continue rising despite the highest interest rates seen in 40 years.

The combination of record-high sales prices and 40-year high interest rates has priced many potential home buyers out of the market.

Instead of clamoring to buy a house, they continue to rent, creating stability within the multifamily housing market.

If you are interested in learning more about how new construction starts could impact returns on multifamily investments, watch our introductory video.

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