Starts for new multifamily rental and condominium construction have dropped precipitously in 2023 from historically high levels in 2022, according to the Dodge Data & Analytics Supply Track construction pipeline. As shown in the chart below, since second quarter 2022, starts have declined at a relatively consistent rate. It is worth noting, however, that the number of starts in the second quarter of 2023 alone was around 100,000 units, according to Dodge Data & Analytics, which was a return to pre-pandemic historical levels.
We believe the decline is due to a combination of short-term supply-side market saturation, the broader increase in interest rates making financing new construction significantly more expensive compared to recent years, and a reported pull-back in construction lending by many banks.
As seen below, apartment rental units continue to be the predominant form of multifamily construction in 2023, which has been the case since 2008. Only 16,338 condo units were started during the first half of 2023, making up only 6.7% of starts, according to Dodge Data & Analytics. Furthermore, condominium starts are declining at a much faster pace: Apartment starts declined 36% year over year, as of second quarter 2023, while condo starts declined 58% during the same time period.
Census Bureau Starts Data Estimates a Greater Number of Units
The U.S. Census Bureau estimated that multifamily starts averaged 552,000 units annualized in the first quarter of 2023, but this data includes condo properties and is extrapolated using an estimated timeline based on permits data. Nevertheless, we expect that Census Bureau multifamily starts will taper off in the second half of 2023 and end the year down 6.4% compared to 2022.
While the level of supply remains above the levels seen during the depths of the Great Recession, overall starts remain well below the extraordinary levels achieved in the 1970s. For instance, in 1973, more than one million units were started
2023 May Be a Record Year for Completions of Apartment Units
According to the Dodge Data & Analytics Supply Track construction pipeline data, the number of apartment units completed across the country may reach a record in 2023. As illustrated in the chart below, nearly 730,000 units are underway with completion dates expected in 2023, though only 164,000 were completed year to date through April. That’s compared to full-year totals of 479,000 units in 2022 and 395,000 units in 2021. The overall pipeline underway is slightly lower than it was a year ago: As of July 2023, 1,116,000 units were underway, compared to 1,141,000 in July 2022. With supply chains operating more efficiently in 2023 than in 2022, we expect more units will complete this year than in 2022.
Class A Supply Comes Online and Pressures Rent Growth, Particularly in Large Metros
Multifamily rental development continues to be concentrated in some of the largest metros in the country, as seen in the table below. New York City continues to be the most active metro in the country, with nearly 150,000 units either recently completed or underway. Dallas and Austin have both overtaken Washington, DC, with Dallas at 74,000 units, Austin with 66,000 units, and Washington, DC with 60,000 units either recently completed or underway. Houston and Atlanta are also expecting at least 50,000 units each will be completed this year. Seattle, Los Angeles, Phoenix, and Miami are expected to round out the top 10.
While much of the current development underway is concentrated in the largest metros, in most metros it is further concentrated in only a few submarkets, particularly in more dense and urban-focused submarkets. Additionally, most units being developed are more expensive, Class A-type apartment units. We believe this potential oversupply of Class A units may depress rent growth relative to Class B, particularly through 2024. For example, CoStar, Inc., is forecasting that Class B year-over-year rent growth will be 3.3% for the year ending Q2 2024, compared to the projection for Class A of 2.6% for the same period.
New Supply Is Elevated in Terms of Inventory in Many Metros – But Not For Long
According to the Dodge Data & Analytics Supply Track pipeline, the number of units underway is elevated in terms of existing inventory levels, as seen in the chart below. Metros such as Austin, Dallas, Jacksonville, Miami, Nashville, Raleigh, and Salt Lake City all currently have pipelines at or above 10% of inventory.
However, we believe that supply and demand will rebalance fairly quickly due to expected demographic trends, job growth, and household formation increases.
Projects Started Declining in 2023
According to the Dodge Data & Analytics Supply Track pipeline, the decline in starts discussed above reflects that, while the number of units per project has increased slightly, the actual number of projects themselves has declined substantially in the first half of 2023, declining to 1,761 projects, down from 3,166 in the first half of 2022, as seen in the chart below.
The average number of units per project increased year-over-year to approximately 129 for the first half of 2023, which is above the average of 111 units per project for the same period in 2022.
Multifamily Supply May be Peaking
The financing costs of new developments have increased substantially since interest rates began increasing in early 2022, another reason why we expect a slowdown in starts activity. Additionally, we believe the more expensive Class A segment may see a disproportionate uptick in vacancy rates, as well as modest rent growth, as the upcoming surge of completions is almost entirely comprised of these types of units.
Since the onset of the pandemic, demand among renters for units with more space and amenities has increased; as a result, we believe it’s possible that future demand may be able to keep pace with this new supply. Despite the potential oversupply in the short term, there is still an ongoing shortage of housing, particularly affordable, in many places across the country. We expect demographic trends to increase demand for housing of all types in the long term.
Joseph Sleeper
Intern – Finance
Tim Komosa
Economist – Senior Manager
Multifamily Economics and Research
8/10/2023
Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR Group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.
© 2023 Fannie Mae