Why is apartment construction booming?

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It was learned this week that the number of new construction projects for single-family homes fell last month, according to the Commerce Department. Building permits also fell. None of this is good news for a housing market that is fundamentally undersupplied – which, by the way, is one of the main reasons why demand for single-family homes is declining in the first place.

But single-family homes are not the only type of housing that exists. Apartment construction, on the other hand, increased. In fact, Goldman Sachs says more apartments are being built now than at any time since the 1970s.

Apartment builders faced the same problems as single-family home builders. Building materials are more expensive, labor is scarce, and interest rates on construction loans are rising.

“And that’s just another impediment to housing delivery,” said Brad Dillman, chief economist at apartment developer Cortland.

He said these costs are only worth it to a developer if the sale price of a house can cover these costs or if the rents on a building are high enough.

“So when rents suddenly go up, it’s very easy to see profitability pick up and start to grow,” Dillman said.

Rents have jumped during the pandemic and they have remained high.

Meanwhile, single-family home prices have fallen this year as rising mortgage rates keep many potential buyers waiting.

That only increases the demand for apartments, said Chris Mayer, a real estate professor at Columbia Business School.

“You know, rents aren’t determined by interest rates,” Mayer said. “And in fact, rising interest rates are pushing people out of the homeownership market into the rental market.”

As the demand for new apartments increases, the incentive to build more also increases. And this trend should continue.

“You know, we’re going to see 40-year highs in new apartment supply in 2023,” said Jay Parsons, an economist at real estate data firm RealPage. “And this wave will last until 2024.”

As a result, Parsons said tenants could get some relief.

“They’re going to have a lot more options, and they should see a lot more competition, because there are more units coming to an end,” he said.

But Parsons said the types of apartments that will come online are mainly those that developers decided to build when costs were high.

“These are generally more expensive rental properties, and they compete for the top tier of the market, in terms of income levels,” he said.

Building more affordable apartments, Parsons said, will likely require government assistance.

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