Census Bureau May Be Off About Apartment Construction Starts

Contrary to what the US Census Bureau recently reported, multifamily construction starts have probably fallen considerably more than the 12% it cited, according to RealPage chief economist Jay Parsons in a new research blog.

Parsons suggests that the drop is closer to 40%, and he gives several reasons, including that private sector data from RealPage and others have reported “sharp” drops.

“These sources track individual products from planned to completion, whereas the Census surveys only a small sample of permit-holders to ask if they’ve started,” according to Parsons.

Given the small sample sizes it uses, the Census understated multifamily starts in 2022 and overstated them in 2023.

The American Institute of Architects has reported 15 consecutive months of declined billings for multifamily, adding that “business conditions remained extremely weak at firms with a multifamily residential specialization.”

Construction financing is another culprit. A survey of apartment developers and builders found that they consistently face delayed projects, according to The National Multifamily Housing Council.

Rents are falling, too, Parsons said, which in turn means a lot of projects “just don’t pencil out,” costs are elevated, debt is high (assuming your bank is willing to lend), and loan-to-cost ratios have dropped from around 65% to 50% to 55%, he said.

The latest Federal Reserve Senior Loan Officer Survey showed that the vast majority of lenders have consistently tightened lending standards for new construction.

That tightening is expected to continue, according to a recent report by GlobeSt.com, regarding Marcus & Millichap’s perspective.

Banks are “getting pressured by regulators to preserve cash and limit commercial real estate lending – even though delinquency rates remain low,” Parsons said, while investors now “can potentially buy new-ish assets for cheaper than they can build them.”

Meanwhile, today, more projects are completing than starting, and peak deliveries are forecast to hit now through 2024, according to RealPage.

“It’s difficult to see a scenario where starts can meaningfully re-accelerate prior to 2026, which means we should see a few years of lower supply,” Parsons adds.

“Developers need to see some combination of lowering rates, steadying/rising rents, falling construction costs, stabilizing asset values, and reinvigorating banks.”