Record breaking construction of apartments in 2023 will contribute to a slowdown in multifamily starts in 2024, but demand is still strong, according to economists and researchers at the December 2023 Real Estate Forecast Summit hosted by the National Association of Realtors.
“Starts for multifamily buildings are already beginning to slowdown, but the one million apartments being built now are all needed,” said Dr. Caitlin Sugrue Walter, vice president of research for the National Multifamily Housing Council. “More apartments will be needed after these units get leased, so the slowdown in starts could mean we have a shortage again.”
An issue impacting multiple markets is the lengthening construction timeline for multifamily buildings.
“Some multifamily buildings are on hold because they’re not financially viable in markets where rent growth is slowing, especially because interest rates are rising,” Walter said. “If rates go down and rent growth rises, this could change.”
Delivery times for multifamily buildings of as long as 70 weeks are common but are an improvement over the 80-week timeline last year, said Ken Simonson, chief economist of the Associated General Contractors of America, which represents contractors who build multifamily buildings as well other commercial real estate.
"Developers tell me they’re waiting for transformers and other elements for these buildings, which means their buildings are sitting there running up costs while they wait,” Simonson said. “It will likely take another year to stabilize this supply issue. In the meantime, other supply issues are likely to be a problem in 2024, such as cement capacity because of demand.”
National Labor Shortage Impacts Multifamily Construction
Materials costs were lower in 2023 than in 2022, which helped reduce some construction costs, but Simonson anticipates that labor costs will rise in 2024 due to the national shortage of workers.
“A big challenge builders face is the lack of skilled labor,” said Danushka Nanayakkara, assistant vice president for forecasting and analysis for the National Association of Home Builders. “There are 400,000 open skilled labor jobs right now. Older workers are leaving and retiring, and there aren’t enough younger workers coming in.”
The lack of skilled workers slows construction times and leads to higher wages because of demand for available workers.
Divergent Rent Data
Rent growth appears to be softening, according to some data, but there’s a gap between government data from the Bureau of Labor Statistics and private sector data from CoStar, said Dr. Lawrence Yun, chief economist and senior vice president of research for the National Association of Realtors.
“If you use the private sector rent data as part of the Consumer Price Index, that will mean inflation is less than 2%, which meets the Federal Reserve’s goal,” Yun said. “If so, then the Fed is likely to drop interest rates in 2024.”
Yun predicts that the Fed will lower the Federal funds rate four times in 2024 and that mortgage rates for a 30-year fixed-rate loan will average 6.3% for the year.
However, rent growth varies by market.
“We see rent growth slightly negative in the South and the West, but it’s positive in the Northeast and Midwest,” Walter said.
Growth Markets for 2024
Lower mortgage rates will improve affordability in 2024. Yun predicts that after a slow housing market in 2023, existing home sales will be up 13% in 2024 and new home sales will be up 19%.
NAR’s list of markets where they expect sales to be up because of pent-up demand, job growth and more affordable homes includes Austin, Dallas, Houston, Nashville, Dayton, Durham, Harrisburg, Philadelphia, Portland Maine and Washington, D.C. An influx of higher-income millennial renters is also a driving factor in those housing markets, which may bode well for multifamily owners and developers in those areas, too.
“For many young people, renting is still the better option because of the size of the monthly payments,” said Danielle Hale, chief economist for Realtor.com. “Anything that can be done to help build more affordable housing is important.”
For multifamily development, Walter said that there’s capital waiting on the sidelines for some transactions to occur and provide more clarity about comps.
“Our contractors are seeing some pullback by developers because it’s more expensive to get financing and sometimes it’s just not available,” Simonson said. “The markets that will see the most multifamily growth next year will depend on demand and on whether banks will offer financing.”