Multifamily starts plummeted in August on a monthly and yearly basis, according to HUD and the U.S. Census Bureau’s latest residential construction report released Thursday.
In August, the seasonally adjusted starts rate for buildings with five units or more was 344,000 down 15.5% from the previous year and 22.5% lower than July, according to the report.
Total privately owned housing starts stood at a seasonally adjusted rate of 1.28 million, down 1.2% from the same period last year and down 2.6% from July.
The single-family segment performed more strongly in August, in a reversal of the previous month’s trend. Single-family starts stood at 918,000 in August, up 5.2% year over year and 7.6% higher than July.
Far fewer new apartments came online in August — likely welcome news for operators still slogging through lease-up. Multifamily project completions were at a seasonally adjusted rate of 302,000 in August, down 35.7% from the previous year and 15.9% lower than July.
Multifamily building permits, which signal future construction activity, stood at a seasonally adjusted rate of 467,000 in August. That’s up 9.4% from the previous year, and down 3.1% from July.
Regional variation
On a regional basis, the West saw the strongest increase in August, with overall housing starts up 5.2% from the previous year. Overall starts in the Northeast were flat YOY, but single-family starts fell 27% YOY, suggesting that much of the building activity was apartments.
By contrast, the Midwest saw the biggest decline: Overall housing starts were down 10.8% year over year in August, although the single-family sector was up YOY. Starts also ticked down 1.2% YOY in the South in August, while single-family activity was up 7.5% YOY.
Midwest developers are encountering underwriting challenges as rent growth has moderated and forecasts are not as strong as they were a year or two ago, according to Jay Lybik, senior director of market research at Continental Properties, which is headquartered in Menomonee Falls, Wisconsin.
“Rent growth is still positive and the outlook is good but in many cases rent growth forecasts are now below the current rate of inflation,” Lybik told Multifamily Dive in emailed comments.
Getting permitting approvals in the Midwest was never easy, according to Lybik, and there are new challenges.
“With high anti-development movements rising to stop construction of data centers, some of that negative sentiment has transferred to multifamily,” Lybik said. “There are countless cities and townships across the Midwest that have enacted residential building moratoriums further limiting places that multifamily developers can then build new properties.”
High materials costs squeeze builders
Lot and labor shortages are constraining homebuilders as they contend with rising construction costs in an uncertain economic environment, according to the National Association of Homebuilders.
“Higher mortgage rates, rising construction financing costs and affordability challenges continue to weigh on the market and limit momentum for new-home construction,” said Bill Owens, chairman of NAHB, in a Thursday release.
Prices for construction inputs rose slightly in August and now sit about 8.9% higher than the same period the previous year, according to an analysis of the latest U.S. Bureau of Labor Statistics data by Associated Builders and Contractors.
Last month, many key building materials saw YOY price increases of 10% or more — including switchgear, iron, steel, softwood lumber, copper wire and several derivative metal products — causing more developers to slam the brakes on projects, Construction Dive reported.
Development in current market conditions overall is just not easy, according to Lybik. Ten-year interest rates at or near 5% are impacting lending costs and, potentially, valuations.
“If the Census data showed 5+ starts declining over the next four months of the year I would not be surprised,” Lybik said. “And actually I would be happy because then the data would be accurately reflecting the market conditions developers are experiencing.”
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