Fannie Mae’s multifamily economics team studies the dynamics of rental markets nationwide. In its Multifamily Market Commentary for March, the team notes that it expects nearly 404,000 apartment to come online in 2017. That’s up from approximately 343,000 deliveries last year. However, just a handful of metropolitan markets account for a disproportionate share of the nationwide total.
In 2016, Boston, Los Angeles, New York City, San Francisco and Washington, D.C., combined accounted for about 79,000 of the total apartment deliveries. This year, they will have around 81,000 deliveries.
In these major gateway markets, which tend to be more expensive than other parts of the country, much of the construction is occurring in the high-rent, Class A tier.
Up, Up and Away
The report data show that the average cost here in the U.S. of constructing a new multifamily building between eight and 24 stories was nearly $32 million in 2016, representing an increase of more than 10 percent in just two years.
In fact, the cost of construction for all types of multifamily buildings has increased every year for the past four years. And 2017 is not expected to be any different. RSMeans estimates the cost of constructing a building with eight to 24 stories will average $34 million this year. That’s about a 20 percent increase in only a few years.
Watching the Top Gateway Cities
The top four metros for new multifamily construction tend to have higher construction costs than the nation as a whole. In 2016, costs for eight- to 24-story buildings averaged $41.4 million in New York City, $38.8 million in San Francisco, $37.6 million in Boston and $33.7 million in Los Angeles. All exceeded the national average of $32.5 million.
Among the leading gateway markets, only Washington, D.C., at $31.2 million, fell below the national average–although just slightly. Even with all of the construction that has been taking place in the area, the city’s multifamily construction costs remain a relative bargain.
This is likely one of the reasons multifamily construction has taken off in the nation’s capital in the past few years. Increased net migration, job growth and a rising renter population have also helped boost activity.
No Ceiling in Sight
Our economists are watching the balance between supply and demand in these multifamily hot spots. We expect most of them to become oversupplied within the next 12-24 months. But we don’t expect to see a moderation in construction costs.
More likely, costs will remain elevated, as RSMeans has projected. And the multifamily market will see the pace of development start to slow in late 2018.
Image courtesy of Fannie Mae