After generations of apartment building booms, some developers are now finding that the economics of ongoing projects no longer make sense.
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Developers are sitting on an increasing number of undeveloped sites as market conditions for apartment construction deteriorate, a new report shows.
After generations of apartment building booms, some developers are now finding that projects they have acquired land for but have yet to complete no longer make economic sense. Wall Street Journal. The culprit? Interest rates are rising, construction costs are rising, loan conditions are more difficult and rents are stagnant in some parts of the country.
The average time for a construction project from construction authorization to the actual start of construction has risen to nearly 500 days, a 45% increase from 2019, according to real estate data company Yardi Matrix.
There has also been an overall decrease in the number of projects launched by developers. Multifamily housing starts fell to an annual rate of 322,000 units in April, the lowest level since the pandemic began in April 2020, according to the U.S. Census Bureau.
“We’re definitely seeing a decline in construction,” said Robert Dietz, chief economist for the National Association of Home Builders. Wall Street Journal. “Deals and financing have dried up.”
The report notes that this decline is somewhat inevitable as a decades-long apartment construction boom has resulted in nearly 500,000 new apartments coming on stream in 2023 and a similar number expected to come on stream in 2024. Help lower rents in some areas.
Additionally, lending conditions have deteriorated as the commercial real estate industry struggles, adding pressure to the books of regional banks that typically provide financing to developers.
David Frosh, chief executive of Fidelity Bank Finance, told the Financial Times: “Their current portfolios are being cut and they don’t have as much money to lend.” Magazine.
This has led developers to look to investors as their most viable source of financing, but investors are also feeling more cautious than when interest rates were lower and rent growth was more stable, making profits for apartment projects more certain.
“The numbers don’t add up,” Frosh told the newspaper.
This has led to some projects being delayed even after construction had begun, such as a project by apartment developer Galena Opportunity in Boise, Idaho, which had to stop work when it was one-third complete, the report said. Investors exit. The project remains stalled while the developer changes plans to reduce costs, the report said.
Some developers, like Seattle-based developer Tyler Carr, are seeking new solutions to keep projects alive when money runs out. Carl told Magazine He is providing affordable housing in one of his stalled developments so they can qualify for government tax credits.
“This is a more severe brain injury,” Carr told the newspaper. “But I think this is a great opportunity. I’m going all out to try new things.
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