Construction hits a snag, but it’s not all bad news for apartment hunters
America’s apartment construction boom hit a snag in August when new building projects plunged by 41% to an annual rate of 334,000, according to the Census Bureau.
The only other time apartment construction fell so dramatically was during the subprime mortgage crisis.
Normally, a decline in construction is a red flag for apartment hunters because it means less housing supply is coming into the market. But in this case, new construction fell because there’s too much of it going on.
Developers are pulling back because of rising interest rates, falling rents (yes, really), and overbuilding in Sunbelt cities like Atlanta, Nashville, and Austin.
Now, experts say apartment hunters only need to sit and wait for rents to come down from their peaks.
“[C]onstruction activity in multi-family projects foreshadows the coming decline in rent prices as more units become available on the market,” said Jeffrey Roach, chief economist at LPL Financial, a San Diego-based wealth advisory.
Although rent prices are expected to moderate, not everyone will benefit equally.
Inventory boost will be barely noticeable in major cities
Nearly 1.1 million apartments are currently under construction in the U.S., according to CoStar, a real estate database. That’s the fastest pace of construction since the 1970s.
The problem? About 40% of the new apartments to be completed are in cities with the highest job growth—Austin, Nashville, Denver, Atlanta, and New York, just to name a few. About 70% of the new apartments will be luxury units catering to affluent professionals.
According to housing experts, most tenants probably won’t see a big enough reduction in rent to make a difference to their bottom line.
“I think we’re in a period of rent flattening for 12 or 18 months, but it’s certainly not a big rent decline,” Hessam Nadji, CEO of real estate firm Marcus & Millichap, told ABC News.
Based on current construction trends, rent prices are expected to decline through 2025, but as new supply dries up, rent prices could start creeping higher beginning in 2026.
Millennials face an unfortunate trade-off
Millennials are caught between a rock and a hard place when it comes to housing.
On the one hand, rising home values have made it difficult for this generation to own a home. On the other hand, due to the sheer size of the demographic, they’re one of the main drivers of rental demand.
And when demand goes up, prices usually follow.
“For the rest of the 2020s, rents will continue to grow because millennials are such a big generation and we’re very much in the hole in terms of building housing for that generation,” said Redfin’s chief economist Daryl Fairweather. “It will take many good years of new construction to build adequate housing for millennials.”
Of course, millennials aren’t the only generation with a high demand for rent. 83% of the younger Gen Zs who live on their own are also renters.