Multifamily Developer Confidence Positive Despite Near-Term Headwinds

Confidence in the market for new multifamily housing development was in positive territory for the second quarter, though the industry continues to face near-term headwinds regarding new development.

The Multifamily Market Survey released this week by the National Association of Home Builders, which produces two indices, showed the Multifamily Production Index (MPI) at 56 and the Multifamily Occupancy Index (MOI) reading was 89.

The MPI measures builder and developer sentiment about current production conditions in the apartment and condo market on a scale of 0 to 100. The index and all its components are scaled so that a number above 50 indicates that more respondents report conditions that are good than report conditions that are poor.

Lance Swank, president and CEO of Sterling Group, Inc. in Mishawaka, Ind., and chairman of NAHB’s Multifamily Council, said reduced availability of credit for new construction, problems getting projects approved, and significant increases in operating expenses are hampering new multifamily development.

He said while multifamily housing demand remains solid, “Property, casualty, and liability insurance has emerged as a major issue facing the multifamily industry, further constraining new supply.”

Some Deals Put on Hold

Max B. Mellman, Managing Partner at Hybridge Capital Management & Founder of Max Benjamin Partners, Inc., tells GlobeSt.com he is still capitalizing deals and projects, “but these deals have a meaningful amount of room in them with regards to YOC (yield on total project cost) and are underwritten to lower trending rents as well as higher DCR/interest rate constraints.

“Deals in top-tier locations with tighter spreads are being put on hold while developments in immerging markets are being capitalized.”

As softer landing becomes more of a likely possibility, Mellman said signs of life in development are starting, albeit “we are not out of the woods yet and we are accounting for rates to remain higher for longer – likely into 2025.

“Developers and having to come to the table with a lot more cash and equity,” he said. “Demand for development is on the sidelines until we see signs of a true soft landing. Many are preparing for a worst-case scenario and are suspect of today’s soft-landing rhetoric.”

David McCullough, ASLA, PLA, Principal Landscape Architect at McCullough Landscape Architecture, tells GlobeSt.com, “As landscape architects and urban designers we have seen some multifamily developments placed on hold due to builders’ access to capital and a general unease with the state of the market. We are also seeing a shift in the way that projects are being planned and built, which appears very positive.

“Among the positive trends are that many are moving projects through the entitlement and building permit process regardless of the earlier comments on the anticipation that capital markets will loosen up over the next few months.

“The thought seems to be that, due to the very real housing shortage in California, developers are anticipating having projects ready for construction at the onset.”