Recent Home-Construction Slowdown Not Seen in Multifamily

Apartment construction – including and especially in suburban markets nationwide – continues to flourish.

Single-family home building activity that occurred in the aftermath of the COVID-19 pandemic in large metro outlying counties and exurban areas, however, has shown a marked decline over the past 12 months, according to the latest findings from the National Association of Home Builders (NAHB) Home Building Geography Index (HBGI) for Q3 2022.

Meanwhile, HBGI’s submarkets in multifamily home building showed increases in growth between the third quarter of 2021 and the third quarter of 2022 for large and small markets as metro area economies reopened following covid-era restrictions.

In large metro suburban counties, construction increased from an 18% growth rate to a 27.5% rate, and large metro core counties saw a 7.1 percentage point increase. Large metro outlying counties decreased from a 44.1% growth rate to a 31% rate.

Walkable, Live-Work-Play Areas Desirable

Toby Veit, vice president of real estate development for Ryan Companies US, Inc. based in Chicago, tells GlobeSt.com that the HBGI is picking up on an ongoing trend seen within the multifamily sector, the integration of the live/work/play community.

“Renters from new graduates to empty-nesters want modern living, with amenities like co-working space, resort-like outdoor decks, and smart technology, located in walkable suburban downtowns.

“However, the supply of existing multifamily options hasn’t kept up with this demand, so we’re seeing an uptick in multifamily construction in large metro suburbs that offer great downtown areas and access to commuter transportation.”

Veit said the walkability and maintenance-free lifestyle is a major attraction that pairs with amazing amenities to provide a superior living experience.

“These suburban city centers offer residents easy commutes to large metro city centers as well as ample access to local restaurants, shops, and nightlife,” he said.

The 2024 Market ‘Is Probably Drying Up’

Greg Procopio, EVP at Procopio Companies, tells GlobeSt.com that this is a prime example of how single-family and multi-family projects take two different paths.

“A single-family home (even if there are hundreds being built in a subdivision) needs only one buyer,” Procopio said. “This buyer has a relatively easy option to bail out or put the brakes on. If they see rates climbing, buyers can make the decision to walk away.”

Multi-family projects take a little more time to stop, similar to trying to stop a cruise ship, he said.

“Decisions we are making today aren’t necessarily affecting our 2022 and 2023 builds, they are affecting 2024 and 2025 projects,” according to Procopio. “We may have projects slated for 2023 that have partners and funding all teed up and ready to go, and we are forced to look at issues around interest reserves due to rates running, but there remains a potential path to get a project going.”

Procopio said he’s also seeing subcontract pricing drop for projects that are in early pre-construction as well as some union pricing coming in closer to open shop.

“This would tell me that the market for 2024 is probably drying up and causing labor prices to push down for future projects,” he said.

Suburbs Present a More Attractive Cost of Scale

Doug Ressler, business manager, Yardi CommercialEdge, tells GlobeSt.com that he anticipates with the increased risk of a recession beginning sometime in 2023 that there is a pause and a “wait-and-see” for the economy to stabilize.

“The decision for developers or property managers remains sustainability and cost efficiencies over a 3- 5- 7-year window,” Ressler said. “The suburbs represent a cost of scale, especially for small developers, as costs of land and permitting there are more friendly than in dense urban cores.”

Suburban Submarkets Not Superior Everywhere

Trevor Koskovich, Northmarq President, Investment Sales, tells GlobeSt.com that construction trends in multifamily show growth across most segments of most markets, with the suburbs of high-growth markets often—but not always—outpacing more centrally located submarkets.

“Dallas-Fort Worth is an example where construction is ramping up throughout the market,” Koskovich said.

At the end of the third quarter, projects totaling more than 63,000 units were under construction in Dallas-Fort Worth, up more than 27 percent from one year earlier.

“The bulk of the construction is concentrated in the region’s fast-growing suburbs, but there has been an increase of more than 60 percent in the number of units under construction in Intown Dallas and other close-in submarkets,” he said.

In Phoenix, the number of units under construction has spiked by 23 percent in the past year, he said.

“About 90 percent of the units that are under way in the Phoenix region are in the suburban regions of the market; the pace of growth in development in close-in submarkets is only slightly slower than the increases in the suburbs,” Koskovich said.

Denver is an example of a high-growth market where there is significant presence of new construction in the urban core, he said.

Approximately 42,000 units are under construction in the Denver metro area, including projects totaling more than 7,500 units in the Denver CBD. The increase in the construction pipeline in both downtown Denver and the Denver metro is up about 30 percent from one year ago.

Finally, there’s Los Angeles, where construction levels at the end of Q3 were nearly identical to the figure from one year ago, he said.

“Nearly half of the units that are under way in Los Angeles are in the downtown region. Construction volumes in Downtown LA are up nearly 10 percent from one year ago.”