Rising Materials Costs Slows Multifamily Pipeline

The rising cost of building materials will continue to slow development over the next year, resulting in what JLL analysts are calling a “rare period of favorable supply-side dynamics.” 

A new report on the multifamily sector from the global CRE firm notes that while new deliveries continue to tick up, challenging occupancy and rent growth in certain cities, a shortage of both skilled labor and materials is allowing markets to absorb supply at a more palatable rate. 

Lumber prices have skyrocketed over the past year, as GlobeSt.com previously reported, leading industry groups like the National Association of Home Builders to lobby the Biden Administration to intervene. Steel has also surged 160%, and some industry insiders have counseled construction firms to stockpile a supply of both building materials for the second half of 2021, as many predict shortages will continue to plague builders.  JLL Senior Research Analyst Henry D’Esposito recently noted that material cost growth will likely outpace all other elements of construction cost increases this year, and that “some developers who were already taking a wait-and-see approach to projects during the pandemic are hesitant to jump back in for fear of buying at the top of the market.”

But while new construction may be cost prohibitive for some, there’s a flip side for savvy, well-capitalized investors: “The dizzying rise in material costs is making existing assets more attractive from a replacement-cost perspective, further increasing demand from equity investors,” the JLL report notes.  And “thirst for yield among defensive asset classes is spurring interest in alternative living concepts, including single-family rentals.”

Growth in the SFR sector has been bolstered by changing household formation trends, demographic shifts, and outperforming leasing fundamentals since the pandemic began. Institutional investors are flooding the space as well, accelerating development pipelines and compressing cap rates.  

“The favorable demand drivers for single-family rentals, built-to-rent properties and manufactured housing are expected to remain very strong, and an increasing proportion of investors are working to get educated on these asset types,” according to JLL’s analysis.