Multifamily starts tick up despite record delays

Headwinds include rising costs and increasing delays, but multifamily construction starts have been able to stay the course.

Multifamily construction starts continue to tick up despite rising construction costs and labor challenges, according to industry data.

Multifamily starts increased in the first quarter of 2021, according to the U.S. Census Bureau. Despite widespread delays and issues with sourcing certain materials, multifamily construction “has been able to stay the course for the most part,” Claire Gray, National Multifamily Housing Council research associate, told Construction Dive.

But the 2021 rebound has taken longer than expected and is still below initial projections, said Katie Willis, senior vice president and central region construction partner at JPI. For example, in Texas, the start rate is almost the same as last summer, but below 2019’s rate. Nationwide multifamily starts are also still down 12.5% year over year, said Gray.

A record 83% of multifamily developer respondents reported construction delays, according to a June NMHC COVID-19 Construction Survey.

The main reasons cited for delays in starts were permitting, entitlement, and professional services (70%); projects not being economically feasible at this time (56%); and economic uncertainty (27%).

“These findings highlight the deep challenges that builders and developers are facing as the economy continues to recover from the depths of the pandemic,” said Doug Bibby, NMHC president.

Additional findings include:

• 86% of respondents reported being impacted by a lack of materials, the highest share recorded since the survey began.
• 100% of respondents reported price increases in materials, another record for the survey and up from 93% of respondents in the previous round. Of those respondents who saw price increases for materials, the average firm experienced a 38% price increase of the past 12 months for its most impacted materials.
• On average, respondents experienced a 201% price increase in lumber costs over the past year.
• Because of rising lumber costs, respondents have taken a variety of actions in response, including repricing projects (62%), making price-saving modifications or eliminations to other materials or fixtures (49%), and delaying the start of projects (39%).
• 47% of respondents reported they are impacted by labor constraints
• 83% of respondents indicated that deals were priced up. Specifically, 69% of respondents indicated deals being priced up 5% or more, compared to just 14% of respondents reporting the same in the last round of the survey.

Investments keep pouring in

Delays are creeping into the pipeline and there is anecdotal evidence this is due to prices and labor shortages, said Nathan Adkins, senior economist at CBRE Econometric Advisors.

“We attribute this to numerous factors, primarily the ongoing economic recovery after COVID-19 and subsequent supply chain issues that have led to commodity scarcity,” said Willis. “From grout to lumber, the materials we’ve taken for granted for decades are now extremely scarce – something I’ve never before seen in my career – so it’s clear this is a major cause of lower-than-expected multifamily start rates and project delays.”

But despite these delays and rising costs, investment dollars keep pouring into the multifamily space. Paula Cino, NMHC vice president of construction, development and land use policy, said investors are moving away from other real estate sectors like office and retail and into the multifamily sector.

However, she added continued volatility and escalation in materials costs can ultimately impact this growth and undermine investment returns. While higher construction prices can sometimes be absorbed by builders and developers in the short term, in the end, these costs can push rents higher or disincentivize new development altogether, said Gray.

A favored asset class

“Capital is mobile and will move away from rent controlled jurisdictions, those with low or declining employment growth and over-supplied housing markets,” said Don Neff, president with LJP Construction Services, a building and development company. “Capital will flow into booming regional economies as we have seen over the past few years, such as Utah, Texas and Florida.”

Many of JPI’s capital partners have also indicated multifamily is the current preferred asset class, and they are increasing development funding despite constraints caused by rising construction costs and materials scarcity, said Willis. She added that JPI has more interested investors than ever before.

“On the investor side of the equation, the COVID pandemic further demonstrated the resiliency of housing, as exemplified by strong occupancy, rents and collections throughout the last 15 months,” said Rick Pollack, managing director at RCLCO Fund Advisors. “As a result, there is a shift in investor appetite from other asset types—office, retail, hotel—into multifamily and industrial.”

But some of this increase is following migration trends as opposed to a reflection of more demand for the product from the investment community, said Pollack. For example, Sunbelt markets garnered more interest from investors than gateway markets, based on strong job and population growth prospects and, in most cases, higher yields, according to CBRE’s 2021 Americas Investor Intentions survey. Willis agrees sentiment surrounding multifamily construction in the Sunbelt markets is “overwhelmingly positive.”

“While the increase in lumber pricing has received the most attention, component costs and lead times have increased throughout. This is largely driven by disruptions in the global supply chain and labor shortages both in production and delivery,” said Pollack. “While it’s likely these issues dissipate over the next six to 12 months, the history of construction pricing doesn’t point to a major pullback, as suppliers have realized the market can bear higher pricing. I would expect suppliers to be able to sustain prices significantly higher than pre-COVID, with the market having limited attractively-priced alternatives.”