Apartment starts plummet nearly 32%

Dive Brief:

  • Starts for buildings with five or more units plummeted 31.8% year over year to a seasonally adjusted rate of 382,000 in October, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.
  • Developers pulled permits for 469,000 units in buildings with five units or more in October, a 27.8% YOY drop. They completed 408,000 units during the month, a 14.3% YOY increase.
  • Overall housing starts hit 1.4 million in October, a 4.2% YOY decline. Overall housing permits came in at 1.5 million, a 4.4% YOY decrease. Builders started 970,000 single-family homes, a 13.1% YOY increase and were authorized for 968,000 units, a 13.9% jump.

Dive Insight:

Although starts are falling, apartment deliveries are expected to rise significantly in 2024 and remain elevated in 2025, according to Yardi Matrix’s revised new construction forecast for the fourth quarter of 2023.

Already, new deliveries and aggressive concessions are causing problems for owners of existing properties, including the major apartment REITs, in the Sun Belt markets like Austin, Texas, and Tampa, Florida. On its third-quarter earnings call, Memphis-based MAA said its new lease pricing deteriorated, dropping 4% to 5% YOY due to rising competition.

Apartment developers got aggressive in Q3 by offering bigger concessions in August and September as the 10-year Treasury began moving toward 5%. With higher interest rates putting pressure on their loans and their ability to refinance, there is added motivation for those builders to get to 90% occupancy by the end of the year, MAA Chief Investment Officer Brad Hill said on the REIT’s earnings call.

“Some of the merchant-built product is in a rush to get stabilized as quickly as possible, preferably before we even get into the holiday season, which is why I think there were a lot of noticeable shifts that took place in August and September,” MAA CEO Bolton said on the call.

Slowing starts

By the end of 2023, Yardi projects 487,512 new unit deliveries in 2023 and another 536,145 in 2024. “We continue to expect a mild recession will start in late 2023 or early 2024,” the report said. “The combination of a weakening economic environment, tight financing conditions and record levels of new supply coming online will materially depress new construction activity in the latter part of 2023 and all of 2024.”

As construction activity falls, costs should eventually decline for those companies that can finance new development.

“In a number of our markets, construction costs have been slower to adjust than we expected, but we continue to see signs that a broader reduction in cost is likely to come,” Hill said on MAA’s call. “Numerous consultants that we work with, including architects and engineers, have indicated their volume of work has significantly decreased in the last few months, providing further evidence of a decline in new construction activity.”

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