Apartment Construction Begins to Slow Down

Apartment building developers may finally take a breather in their rush to build new units.

“Starts will begin to slow down soon, translating into more moderate development activity by late 2020,” says Jeanette I. Rice, Americas head of multifamily research for CBRE Research.

There are still hundreds of thousands of new apartments already under construction, scheduled to open over the next year or so. But rising interest rates, rising construction costs and already tough lending standards are making it more difficult for developers to keep building at the rate they have been. Developers took out fewer permits to build new properties in September compared to previous months.

“The shift is a mild pullback, rather than an abrupt move to lesser activity,” says Greg Willett, chief economist for RealPage, a provider of property management software and services.

Strong demand for apartments has kept developers and investors interested in starting new projects despite the growing number of vacancies in many markets. Rents are still rising, even if not as quickly as they had in recent past.

“Development, just like investment, is a lower return environment than in previous cycles. But the very strong appeal of the sector makes this acceptable to market participants,” says Rice.

Fewer permits and construction starts

Developers have been taking out fewer permits to build apartment buildings. Their seasonally-adjusted annual rate of permitting has been slowing down since March 2018—shrinking to 351,000 in September 2018. That’s well below the average rate of 417,000 permits per year for 2018 so far, according to data from the U.S. Census.

“One can expect the decline in permits to translate into a decline in starts in the coming months,” says Rice.

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