Balancing Act: The State of Multifamily Construction


It’s no secret that residential development is cyclical, and the multifamily sector is currently experiencing mixed conditions with steady supply coming online and lower starts.

Confidence in the market for new multifamily housing declined year over year in the first quarter of 2024, according to the National Association of Home Builders’ Multifamily Market Survey released in May. The Multifamily Production Index, which measures builder and developer sentiment about current production conditions in the apartment and condo market, had a reading of 47, down three points year over year. The index is scaled so that a number below 50 indicates that more respondents reported conditions are poor versus good.

Top Challenges
For Chip Bay, chief construction officer at Mill Creek Residential, the past four-plus years “have been among the most challenging in our industry, at least in my experience. Today, while the market has softened, we have not seen a real pullback in costs. Some areas have improved, while others have not.”

Rate Uncertainty
For the most part, Tomaszewski says 2024 has unfolded as expected. “Many in our industry were hopeful for interest rate cuts starting this year, but it seems unlikely that rates will decrease until the end of the year at the earliest,” he says. “This ongoing high interest rate environment is making it difficult for developers to start new projects, which will impact supply in the coming years.”

Higher interest rates have also been the biggest obstacle for CAPREIT, pushing starts back about six to eight months, says Chris Pilato, the firm’s chief development and construction officer.

“New construction continues to be a challenge,” Pilato explains. “With interest rates stubbornly high, it is very difficult to make deals work financially. We have a couple of projects moving forward in the Sun Belt, but it is a slow process. On the encouraging side, we have seen construction prices trending downward, which is a positive sign for future growth.”

Byrum says the industry is “really concerned about the Fed funds rate and inflation.” She says expectations for third quarter and fourth quarter rate cuts are high, and if there is not a rate change until November or after, it will be the longest period on record with no rate change.

Supply Chain Stabilization
While there are some lingering supply chain issues, the general consensus is that the major disruptions are in the rearview mirror. The biggest issue of late seems to be with “devices related to power,” Bay says, such as switchgear and transformers. Dietz notes that some apartment developers say they’ve slowed down timelines because they can’t guarantee when they’ll get that equipment.

“Material supply chain issues and pricing have started to stabilize,” Tomaszewski says. “While we still face delays with specific items like transformers, the severe disruptions we encountered previously have largely been resolved. We’ve seen a leveling off of material price increases and continue to apply best practices developed during the height of the supply chain disruptions to stay ahead in ordering and inventory management.”

In addition to power-related infrastructure, Bay says Mill Creek occasionally experiences issues with appliance availability or concrete, but “we continue to see improvement in pricing as the market slows in terms of starts.”

Dietz points out there are still tariffs on lumber from Canada, which accounts for about one-third of the lumber supply. The current 9% tariff could go up to 13%, he says. Building materials pricing has been relatively flat over the past year, but gypsum pricing is going up. While things are better than they were in 2021, Dietz says gains in single-family construction could result in some tightening.

Labor Focus
Mill Creek has scaled up its construction team over the past three years, doubling its size. The company has also made recruiting and retention a top focus.

“While we are known for our communities, our amenities, and the service that our property operations groups provide, we really should be known for our people,” Bay says. “They make the difference for us every day. When it comes to building the team and retention, we focus on the interviewing and onboarding process while aiming to build and maintain a culture that folks want to be a part of.”

Policy Impact
The industry continues to deal with regulatory red tape, which drives up costs and impacts project timelines. Regulations at various government levels account for more than 40% of multifamily development costs.

“While these regulations are well-intentioned, they often lead to unintended consequences that add unnecessary costs to building multifamily units,” Tomaszewski says.

Pilato says CAPREIT is experiencing challenges with municipal approvals and permitting, which he thinks will become more burdensome over time.

“High impact and regulatory fees drive up our overall project costs,” he says. “This limits what markets we can develop in, as we need higher rents and square footage to achieve an acceptable return on investment.”

For Mill Creek, Bay points out that code changes “are an ongoing challenge that impact pricing, affordability, and the construction process.”

In April, the Department of Housing and Urban Development (HUD) and U.S. Department of Agriculture (USDA) issued a final determination that requires all HUD- and USDA-financed new single-family construction housing to be built to the 2021 International Energy Conservation Code (IECC) and HUD-financed multifamily housing be built to 2021 IECC or ASHRAE 90.1-2019. The rule went into effect May 28, but the compliance dates for the building code mandates are 12 months after the effective date for multifamily projects; 18 months after the effective date for single-family homes; and 24 months after the effective date for homes in “persistent poverty rural areas.”

According to NAHB, this mandate will do little to curb overall energy use but will exacerbate the housing affordability crisis and hurt the nation’s most vulnerable house hunters and renters.

Hot Markets
The Annex Group is particularly active in what Tomaszewski calls “secondary medium market cities, where there is a significant need for affordable and high-quality housing units.” He says these markets—such as Des Moines, Iowa; Lincoln, Nebraska; Wichita, Kansas; and Ann Arbor, Michigan—tend to have less regulatory red tape, and city governments are typically more welcoming of affordable housing projects.

In the short term, Pilato thinks the increased supply and lower starts will put pressure on rents in supply-heavy markets. “We have seen this in Nashville, Tennessee, with our existing communities,” he says. “From a long-term perspective, the lower starts will continue to put pressure on supply and move rents higher. In the markets we are developing—Greenville, South Carolina, and Southwest Florida—there is still high demand and relatively low supply.”

Mill Creek—ranked No. 2 on the 2024 NMHC Top 25 Developers list—is currently active in more than 20 markets, says Bay, noting that the busiest are Phoenix, Seattle, Nashville, and South Florida.

Looking Ahead
Economic uncertainty will continue to string us along through 2024, according to Byrum. While the coming months will present challenges, those in the industry seem ready to overcome them.

“We’re seeing groups position themselves cautiously to move very quickly if they sense there is interest rate relief on the horizon,” Rihani says. “Folks who want to deliver in 2026 and 2027, there’s a lot of conservativeness when it comes to spending money today to get to that outcome, especially in some of these more regulated markets where the capital may not be there. Everyone’s moving forward prudently at this point.”

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