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Analysis: How Reliable Are the Census Multifamily Starts?

The U.S. Census Bureau’s November data showed that multifamily construction starts had declined by 12% on a year-to-date basis compared to the same period of 2022. Given the talk of apartments and overall housing scarcity, this number, while not significant, could be considered manageable.

But Jay Parsons disagrees with the Census information, pointing out that the drop in construction starts is more like 40%. Parsons, RealPage’s senior vice president and chief economist, indicated several reasons for a more significant decline in apartment construction starts.

Different data sources. While the Census Bureau tracks a small sample of permit-holders to determine if they’ve launched construction on projects, private-sector data providers (like RealPage and Yardi Matrix) track individual projects from planning to completion. These data providers report a sharp drop in construction starts.

Decline in demand for architects. In quoting information from the American Institute of Architects, Parsons said there have been 15 consecutive months of declined billings for multifamily. “They’re designing far fewer apartment projects since rates started climbing,” Parsons said, adding that the AIA noted that conditions at firms specializing in multifamily residential “remained extremely weak.”

Lack of construction financing. For this, Parsons turned to the National Multifamily Housing Council and its surveys of apartment developers. The surveys report that 90% of projects were delayed in 2023 due to a lack of construction financing availability. “Lots of projects just don’t pencil out when rents are falling, costs are elevated, debt is high, and loan-to-cost ratios have dropped from around 65% to 50-55%. Additionally, according to the Federal Reserve’s Senior Loan Officer Survey, “the vast majority of lenders have tightened lending standards for new construction,” Parsons noted.

Sidelined capital. Along with less available debt, those with equity to spare aren’t necessarily putting it into ground-up constructions. Parsons noted that falling asset values are attractive to investors, who can spend less money on an operating property than one that has yet to break ground. “Only certain types of deals are finding willing partners,” Parsons explained.

What it all means. Don’t be surprised to see elevated deliveries in 2024 thanks to 2021-2022 starts, Parsons said. Look for peak deliveries to hit through the end of next year. But after that time, look for demand to massively outstrip supply.

“It’s difficult to see a scenario where starts can meaningfully re-accelerate before 2026, which means we should see a few years of lower supply,” Parsons explained. “Developers need to see some combination of lowering rates, steadying/rising rents, falling construction costs, stabilizing asset values and reinvigorating banks.”

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