Apartment construction is facing rising interest rates, declining rents and overbuilding in some areas. As a result, 2023 has seen 41% fewer new-project starts.
NEW YORK – The number of new apartments starting development has dropped dramatically this year, a consequence of higher interest rates and declining rents, as well as some possible overbuilding in certain areas.
Apartment building starts dropped to a seasonally adjusted annual rate of 334,000 units in August, resulting in a 41% decline from the pace seen the same month a year prior, according to the Census Bureau.
“We expect to see about two years of greatly reduced building,” says Greg Willett, first vice president at Institutional Property Advisors.
Falling starts come on the heels of record apartment construction across the United States. More rental buildings are expected to open in 2023 and 2024 than at any time since the 1980s, according to some forecasts. That crush of new rental supply is driving up apartment vacancies and causing rent growth to flatten or even turn negative in some places.
Builders cite construction financing cost and scarcity as the major reason they cannot make new projects pencil out. Banks are lending far less often, and when they do lend, they’re tightening standards.
Also, a construction loan that once came with about 4% interest now charges close to 8%.
Developers have tried to compensate by raising more equity from investors. But the relative lack of building sales this year has made it difficult for investors to predict how much a building will be worth when it is finished, says Toby Bozzuto, chief executive of apartment builder the Bozzuto Group.
Source: Wall Street Journal (10/02/23) Parker, Will
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