Dive Brief:

• Starts for buildings with five or more units hit a seasonally adjusted rate of 334,000 in August, a 41% decline from August 2022, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Starts also decreased 26.3% to an annualized 342,000 pace for two-plus unit construction in August.
• Developers pulled permits for a seasonally adjusted rate of 535,000 apartments in August, which was a more modest, yet still notable, 17% decline from August 2022. Completions for buildings with five or more units came in at 433,000, a 32% year-over-year increase, as companies continue to work through projects they began when financing was more plentiful.
• Overall, housing starts fell to their lowest level since 2020, coming in at 1.28 million, a 14.8% YOY decline. Permits dropped 2.7% to 1.54 million. Builders completed 1.4 million units in August, 3.8% above August 2022’s rate.

Dive Insight:

For yet another month, high borrowing costs held down starts for housing of all types. But that wasn’t the only factor, especially on the single-family side.

“Higher mortgage rates averaging above 7% put a damper on single-family production in August, as builders also continue to face supply-side challenges in the form of elevated construction costs, a lack of skilled labor and a shortage of buildable lots,” National Association of Home Builders’ Assistant Vice President of Forecasting and Analysis Danushka Nanayakkara-Skillington wrote on the association’s Eye On Housing blog this week.

Demand continues to persist on the single-family side. New home sales increased 31.5% YOY to 714,000 in July, according to HUD and the Census Bureau.

On the multifamily side, sales of apartment communities, including new ones, have fallen as buyers face trouble finding financing or making the underwriting pencil out. As a result, developers are holding onto properties longer than they initially expected. 

“I think everybody's in that same boat where they're trying to decide the perfect time to sell,” said Allyson McKay, managing director and executive vice president of management services at San Antonio-based developer and manager Embrey Partners. “But currently, we are holding a little bit longer until we find the right time to sell.”

But for developers who plan to hold their assets or just want to open in an advantageous leasing environment, breaking ground in 2024 can make sense, if the numbers work. Memphis-based MAA expects to start three projects in the back half of 2023 if it sees adjustments to construction costs and rents to support its yield expectations.

“Any project we started in the next 12 to 18 months would likely deliver in 2026 or 2027, and should be well positioned to capitalize on what we believe is likely to be a much stronger leasing environment, reflecting the significant slowdown in new starts expected over the balance of 2023 and 2024,” MAA’s Chief Investment Officer Brad Hill said on the REIT’s second-quarter earnings call.

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