Panelists at IBS Foresee Continued Construction Decline

Speakers at the International Builders’ Show predicted that apartment starts will fall 20 percent this year.

Danushka Nanayakkara-Skillington of NAHB (center) and Selma Hepp of CoreLogic (right) delivered their 2024 multifamily outlooks at the International Builders’ Show in a session moderated by NAHB’s Dean Schwanke. Photo by Diana Mosher

Multifamily starts are predicted to decline further in 2024, according to the National Association of Home Builders. In 2023, multifamily starts totaled 472,000 units—down 14 percent compared to the previous year. NAHB’s apartment experts are projecting that this year multifamily starts will fall 20 percent to a 379,000 total.

“Multifamily construction is forecasted to post a large decline in 2024 as the number of units currently under construction—approximately 1 million—is near the highest level since 1973,” Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis, said at the NAHB International Builders’ Show in Las Vegas last week.

“Tight lending conditions and the high cost of development loans continue to hinder additional multifamily housing production,” said Nanayakkara-Skillington, speaking on the conference’s “Multifamily Economic Outlook” panel.

On a regional basis compared to the previous month, combined single-family and multifamily starts are 20.6 percent lower in the Northeast, 30 percent lower in the Midwest, 9.7 percent lower in the South and 15.7 percent lower in the West.

Construction prices have come down, gypsum prices have declined 2 percent over the last four months and steel prices are down 2 percent, as well, due to lower lumber prices. However, the price of lumber will rise if anticipated Canadian lumber tariffs are implemented. “Lumber prices are going to go up—if we don’t increase domestic production—which is highly unlikely,” Nanayakkara-Skillington explained.

As new apartment units come online, rent growth will slow, helping to ease inflation. But this new supply will chill the market before stabilizing in 2025, according to Nanayakkara-Skillington. NAHB is forecasting for 388,000 units in 2025.

In addition to tight lending conditions and the high cost of development loans, multifamily faces a shortage of skilled labor. There are currently 9 million open jobs in the U.S. and the construction industry is short more than 400,000 workers. Economists predict this challenge will grow worse as building rebounds.

“The labor force participation rate has not recovered since the pandemic, and we are watching this indicator,” said Nanayakkara-Skillington. “Attracting skilled labor will remain a key objective for construction firms in the coming years.” She added that the industry needs to bring more women into construction, and factory built housing is a good way to do that.

Uncertain forecast for existing apartment assets

New construction aside, the forecast for existing multifamily assets is equally cloudy. “Multifamily is very similar to single family in terms of sensitivity to changes in mortgage rates,” said Selma Hepp, chief economist at CoreLogic. “Mortgages are high and still going up a bit. However, mortgage rates are expected to decline throughout 2024. While Fed rate cuts are still uncertain, consensus expectations peg mortgage rates at 6 percent by year-end.”

Falling valuations and high mortgage rates have impacted cap rates which have gone up considerably to where they were in the last couple of years, according to Hepp. “But in many ways they do appear to be stabilizing at this point. And they seem to be lower in higher population growth markets—obviously across many indicators when you look at what’s happening in individual markets,” said Hepp. “Cap rates are expected to stay elevated and put downward pressure on property prices but slight declines and stabilization should occur in 2024.”

Last year, multifamily markets continued to struggle following the 2022 slowdown. “Sales activity remained very slow as price uncertainty and high mortgage rates rattled buyers,” said Hepp. The decline in sales was more pronounced in the West and in markets with more new construction. Apartment valuation declined 11 percent in 2023 vs 2022, but the rate of declines did slow last year.

According to Hepp, falling valuations and surging mortgage rates are driving apartment cap rates higher from record lows. Cap rates remain lowest in markets with high population growth and price growth is highest in high population-growth markets.

Multifamily property sales collapsed in 2023. According to Hepp, uncertainty continues into 2024 as cap rates and valuations, base interest rates and rate volatility negatively impact financing as well as fears of rent declines and new inventory.

“Multifamily delinquency rates are on the rise. Delinquency rates are rising across capital sources due to higher interest rates, changes in property market fundamentals and uncertainty about property valuation,” said Hepp. But commercial real estate markets are large and heterogeneous leading to wide differences in mortgage performance by property type. Hepp added, “Outcomes will depend on deal vintage, term, market and many other factors. Many have equity. Low equity properties are likely not resetting until 2025.”

The demand for homes to buy or rent was weak throughout 2023. Rents slowed and declined across markets and property types. “Rents in pandemic boomtown markets are now cooling most rapidly, but pent-up demand continues to build,” said Hepp. Young adults currently living with parents and the arrival of new immigrants continue to contribute to the demand for housing.

“We are watching the pent-up demand for housing. It speaks to people who could potentially come into the market if they have jobs, if they have some savings and if they’re done living with their parents. The other component is immigration,” added Hepp. “And the third is that we simply have under built for so long.”

You May Also Like