Multifamily Permitting Falls 32% Year-Over-Year

There are going to be fewer apartment buildings built in the near term as interest rates and slowing rents make it unfeasible to begin new construction. According to an analysis by Real Page, the U.S. Census Bureau shows a seasonally adjusted drop in multifamily permitting as of July 2023 of 32.2% compared to the prior year. This is 220,000 fewer units than in July 2022. Similarly, completions of new multifamily properties are down 23.3% from last July. The pipeline for new construction is shrinking and those who received permits in better economic times are shelving their projects until there’s more economic certainty. This is bad news for the renter.

It can take 12-36 months to construct an apartment building, depending on the market and jurisdiction. Slowing permits now will not have an impact on the supply today, but it will have repercussions in the future. The anticipated large wave of new construction post-pandemic is lessening and may not fully materialize. It’s like a wave in the ocean that dissipates as it reaches shore. The reduction in completions will have an impact in the short term, and the drop in permits will be felt in one to two years. Either way, it will cause rents to increase if demand stays the same or increases by any amount.

While the broader US saw a massive decline in multifamily permits year-over-year, there is great variation when examining the largest MSAs. For example, Austin, TX saw a 34.4% decline in permits compared to a year ago. However, Raleigh-Durham, NC had a 38.2% increase in permits. Dallas, TX, a market so huge it always makes an impact, saw a modest 8.2% increase in permitting activity. I would argue that Austin was on the front-end of new supply given how desirable it has been and the general consensus that Austin’s hyper-growth would continue. Raleigh-Durham (RDU) is a market picking up momentum as places like Austin cool ever so slightly. Despite the recent surge in permits there, we expect the distribution of new properties to mirror those that are currently under construction. Those properties are relatively evenly spread out across the RDU metro, with Central Raleigh the biggest recipient of new assets. 

The uncertainty in the multifamily market is palpable with interest rates at recent highs, slowing rents in once high-flying markets, and new supply either stalling or ramping up depending on the market. With the prices of apartment properties down 20-30% from the highs in late 2021, we believe it is an advantageous time to purchase new assets in the right markets. We continuously track rents and new supply to see where there is near-term weakness in generally strong metros in order to find some of the best bargains. This targeted approach has helped Calvera uncover properties in coveted markets like Austin, TX, Chapel Hill, NC, and Fort Worth, TX at discounts relative to other sales. More opportunities will continue to surface over the coming months.