Multifamily Developers are Facing an ‘Acute Crisis’ with Record-High Cost of Construction
By Gordon Robbins @ Real Estate Daily
February 20, 2018

Multifamily construction is booming as developers are racing to cash-in on inflated luxury markets. The shortage of affordable rental housing, however, has only been exacerbated by the recent boom in luxury construction. Now some of the nation’s largest cities are flooded with luxury apartments, and construction cost has risen to a record-high.

Key Takeaways

  • Apartment completions beat projections by 46% in 2017
  • Luxury buildings accounted for between 75-80% of new supply in the current cycle
  • Rents for affordable housing are increasing while rents for luxury housing are flattening
Source: CNBC


Apartment completions in the 150 largest U.S. cities jumped to 395,775 units in 2017, beating 2016 production by a staggering 46 percent and more than doubling the long-term average, according to RealPage, an apartment management software and data company. Luxury, upscale buildings accounted for between 75 and 80 percent of the new supply in the current cycle.

“It’s really tough to deliver product at those lower price points. The cost of land, the cost of building materials, the cost of labor. It’s really about the same regardless of what product you’re doing and it’s just tough to make a deal work financially if you’re going toward that middle-market price,” said Greg Willett, chief economist at RealPage.

Despite rising incomes, nearly half (47 percent) of all renter households (21 million) pay more than 30 percent of their income for housing, including 11 million households paying more than 50 percent of their income for housing, according to a late 2017 report from Harvard’s Joint Center for Housing Studies.

“While the market has responded to rental housing needs for higher-income households, there are alarming trends that suggest a growing inability to supply housing that is affordable for middle- and working-class renters, let alone those with very low incomes,” said Christopher Herbert, the center’s managing director.

Rents on the high end flattened in the last year, and landlords are starting to offer concessions, like high-end amenity packages or a month’s free rent.

Investors, according to Bozzuto, are now moving away from new construction and instead rehabbing older rental stock. These so-called value-add projects just raise the rents on current tenants even more.

There are some government programs that offer developers financial incentives to build lower-income housing, but they don’t meet the needs.

“Those are finite and many, many of us are competing for those very finite resources,” said Bozzuto, adding that the luxury market is, “on the precipice of oversupply, but I think macroeconomic conditions are actually going to keep us this year from developing much further. Costs in particular, land costs, hard costs mostly driven by labor, will ultimately make it harder to build new buildings.”

View the original article at CNBC