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Apartment Construction is at a Five-Year Low

Sep 29, 2020 by Lena Katz

Apartment construction over the summer was at a five-year low, according to CRE data company Yardi Matrix. Between worker shortages, closures of municipal offices, and disruptions to the supply chain, more than 50% of leading multifamily construction companies reported construction delays in a National Multifamily Housing Council (NMHC) Covid-19 survey over the summer.

Factor in a severe lumber shortage, plus a spike in both multifamily and single-family housing starts, and you get a clear picture of a new construction market that’s outgrown the available resources. Not only are builders struggling with timelines amidst the unprecedented difficulties of the pandemic, they’re competing against each other for supplies and workers. This potentially makes things difficult for housing-insecure citizens and for developers whose projects are mired in delays –- but for investors who can navigate this volatile season, there’s potential to come out ahead.

The need for rental apartments: It’s not new

Residential housing demand is at a peak, but there are also millions of people who either can’t afford to buy regardless of how low interest rates go, and there are many others who will eventually see their homes foreclosed on, once CARES Act mortgage forbearance is discontinued. Thus, it makes sense that developers and large multifamily companies are investing heavily in rent-to-own apartments, micro-apartments and various other inexpensive housing types. Even prior to the pandemic, there was a serious housing shortage in the U.S., especially on the lower/medium end of market rate.

2020 hurdles

According to responders on the NMHC survey, key reasons for delays included:

  • Delays in permitting.
  • Issues with professional services.
  • Availability of financing.
  • Economic uncertainty.
  • Health and safety concerns.

So, what are developers to do when faced with slowdowns in bureaucracy, various material shortages, and ever-changing health regulations that impact how and whether crews can operate? The short answer is they struggle on through, knowing that while the timelines may need to be changed, there will be even more intense demand once the units are ready.

And in good news for the industry, although construction moratoriums had delayed 62% of survey respondents during Round 1 (March 27-April 1), by Round 4 (July 6-15), this was no longer a factor.

The silver lining for real estate investors

When studying the current landscape, it’s important to note that this Yardi Matrix data came from a survey of major construction firms building rental apartment buildings of 50 or more units. For the investors who have committed millions to such projects, it’s a frustrating time. But for investors who prefer to buy smaller income properties -- like walk-up apartments, small cluster homes, row houses, etc. -- there’s tremendous demand, especially in major cities, and not as much competition as expected.

Whereas last year, if you bought a fixer-upper triplex with an intent to rent, you might have thought you'd be going for the same potential tenants as three new-construction luxury buildings in the same city, this year might very well have brought delays for all those projects. And if you didn’t buy that fixer-upper because you were afraid to compete? Start looking for another. Housing demand is only going to continue increasing as long as supply is not met.

The bottom line

In looking at the rental apartment category within real estate investment, one can see temporary problems, but really, overall, it’s strong. For folks looking to break into residential real estate investment, scout up-and-coming neighborhoods for potential quick-fix income properties. You may already be able to find some great rentals coming onto the market, as Airbnb speculators who were overextended going into the pandemic are forced to offload their vacation rentals. For larger investors, there’s likely going to be a longer-term journey to overcome the recent setbacks around supplies, workers, and city approvals to complete those big 50- or 100-unit new builds. But the ROI seems nearly guaranteed -- once projects can be completed.

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