The Development Pipeline

The impact of a slowdown in multifamily construction and how it's paving the way for a landlord-favorable market.

Summary:

HSR’s CEO Joseph Penner and CIO Paul Perkins recently discussed current trends in the multifamily development cycle. They noted a nationwide slowdown in new construction starts, triggered by rising capital costs and slower economic conditions, which marks a significant shift in the real estate landscape.

Paul Perkins explained that the construction boom of 2021-2022, initially fueled by low-cost debt, is winding down due to increased interest rates, higher labor costs, and persistent high material costs. With construction permits dropping sharply across the country, he predicts a prolonged period of reduced development activity. This slowdown is expected to last several years, allowing the market to absorb the recently completed units.

As the economy begins to recover, the demand for rental housing is projected to substantially exceed the available supply, creating a strong landlord's market characterized by rising rents due to unit scarcity. Perkins drew on historical patterns to predict that this cycle will resemble past ones where rapid construction phases were followed by significant market adjustments.

He emphasized that future properties will need to command much higher rents to offset increased construction and operational expenses. This scenario is favorable for landlords who acquire properties now, especially those bought at discounts to replacement costs, as they will benefit from higher cash flows when market rents increase.

View the full interview with CIO Paul Perkins here.