SS227: The Decline In Apartment Construction

SS227: The Decline In Apartment Construction

Over the past three years, the U.S. has seen a major slowdown in apartment construction. In this Strategy Saturday episode, Charles Carillo explores the causes behind the apartment construction slowdown in 2025 and explains how it will reshape housing markets, rental rates, and multifamily investing nationwide.

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Talking Points:

  • If you receive our weekly real estate newsletter, you know that we regularly discuss how apartment construction has been slowing (as a side note: if you do not already receive our weekly newsletter that we put out on Wednesday, you can sign up for free at: HSPsignup.com – HSPsignup.com. You can literally read it in under 1 minute). The apartment construction market has been experiencing a significant slowdown as the cost of financing has increased since mid-2022.
  • The U.S. Census Bureau has reported a 41% decline in multifamily construction states from its peak in April 2022. It typically takes about 2-3 years for new apartment complexes to be constructed, and in 2024, the U.S. completed 518,000 units, an all-time record and up 9% from 2023. Many of these projects delivered in 2024 were begun during the low-interest rate environment of 2021.
  • In 2025, there is an expected 15% decline, around 444,000 new apartment deliveries, and that downward trend will continue throughout 2026 and 2027, with an expected rebound in 2028 with 391,000 new apartments anticipated.
  • So how do new apartment deliveries affect apartment owners?
    • Since most apartment deliveries are Class-A apartments, it mostly affects Class-A apartment owners, but that also trickles down to Class-B apartments and possibly Class-C.
    • When new apartments are delivered, they are offered on the market with concessions. During times of massive apartment deliveries like 2023 and 2024, these concessions can be massive. Instead of a move-in special of one month free, they start offering multiple months for free, half off rent for an extended period, making tenants flock to these units.
    • For example, a new apartment complex opens across the street from a Class-B complex, which rents 2 bedrooms for $1,500, and the new complex is renting for $2,000. There wouldn’t be much pressure on either property in regular market conditions. Tenants looking to spend an extra $6k per year for a new unit would go to the Class-A, and the Class-B tenants would stay put. However, when the new Class-A starts offering 2 or 3 months of free rent, the pricing becomes very comparable. The Class-B tenants can move to the new building for pretty much the same price over a 12-month period. Then, we start to see the pressure that is pushed through the market.
    • Of course, when renewals occur, these concessions will start burning off, little by little, just enough for people not to move, but the concession pressure can last for years.
  • As new deliveries slow over the next 3 years, we will start seeing rent increases again since concessions will not be as aggressive. There might still be a free month of rent at that new property, but your Class-B property most likely won’t lose people to the new Class-A complex for just 1 month of free rent. Additionally, if interest rates increase or high inflation restarts, the slowdown in multifamily starts may continue. Troubled apartment owners harmed by higher interest rates over the past few years may get some relief with rent increases, but that might be too little too late.

Transcript:

Charles:
Over the past few years, the real estate market has been inundated with new apartments and developers have been offering amazing move-in specials to entice new renters. However, apartment construction is dropping off a cliff and rents are about to increase. Welcome Strategy Saturday, I’m Charles Carillo, and today we’re discussing the decline in apartment construction and more importantly, what many investors are getting wrong about the current impact on property performance. Now, if you receive our weekly real estate newsletter, you know that we regularly discuss how apartment construction has been slowing. And as a side note, if you do not already receive our weekly newsletter, which is published on Wednesday, you can sign for it free at hspsignup.com. So HSP like harborside partners signup.com, and you can literally read it in under one minute. So the apartment construction market has been experiencing a significant slowdown as the cost of financing has increased since mid 2022.

Charles:
And the Census Bureau has reported about a 41% decline in multi-family construction starts from its peak in April of 2022. So it’s typically takes about two to three years for a new apartment complex to be constructed. And in 2024, the US completed about 518,000 units in all time record, and a 90% increase from 2023. Now, many of these projects delivered in 2024 were begun during the low interest rate environment of 2021. Now here we are in 2025. There was an expected 15% decline with around 444,000, a new apartment deliveries. And this now trend is expected to continue throughout 2026 in 2027 with a rebound that’s anticipated in 2028 with 391,000 new apartments being expected. So how do new apartment deliveries impact apartment owners? Now, since most apartment deliveries are Class A apartments, it primarily affects class A apartment owners, but this also trickles down to Class B and possibly Class C apartments.

Charles:
Now, when new apartments are delivered, they’re offered on the market with concessions. Okay, so during periods of significant apartment delivery such as 2023 and 2024, these concessions can be substantial. Instead of a moving special of one month free, they start offering multiple months for free half off rent for an extended period, making tenants flock these new units. Sometimes even on the renewal, they will give some sort of concession. Now, some more examples for a new apartment complex that opens across the street from a Class B complex, which rents two bedrooms for $1,500, and the new complex is renting for 2000. Okay, so ordinarily there would not be any pressure on either property and regular market conditions. Tenants looking to spend an extra $6,000 per year for a new unit would opt for the Class A while Class B tenants would stay put. However, when the new class A starts offering two or three months of free rent, the pricing becomes very comparable, and Class B tenants can move to the new building for approximately the same price over a 12 month period.

Charles:
And then we start seeing the pressure that is pushed through the market. Now of course, when renewals occur, these concessions will start burning off little by little, just enough for people not to move. But the concession pressure can last for years. Okay, as new deliveries slow down over the next three years, we’ll start seeing rent increases again, as concessions will not be as aggressive. There might be still a free months of rent or you know with the new property, but your Class B property is unlikely to lose people to the new class, a complex just because of one month of free rent. Additionally, if interest rates increase or high inflation restarts, the slowdown in multifamily starts may continue. And apartment owners who have been negatively affected by higher interest rates over the past few years may find some relief and run increases, but that might be a little too late. So please remember to rate, review, subscribe, just make comments and potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentor our programs at syndicationsuperstars.com that is syndicationsuperstars.com
Look forward to two more episodes next week. See you then.

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