New Apartment Deliveries Peak As Construction Permits Plummet
The wave of new apartment deliveries spurred by pandemic-era construction has crested.
Just over 576,000 new apartments came online in the trailing 12 months ending in March, down from the 585,200 units built in 2024 and the first quarterly decline in more than two years. It is a shift that is expected to last as new deliveries continue to decline, according to RealPage.
Annual supply is expected to drop to around 431,200 units by the end of the year, with a steeper falloff through 2028, at which point RealPage projects that delivery volume will be below historical averages.
The pace of deliveries reflects the exuberance from multifamily investors early in the pandemic, when low interest rates and a new focus from tenants on their living space kicked off a development frenzy, especially in Sun Belt markets that were attracting new arrivals from the Northeast.
But the Federal Reserve’s move to raise interest rates beginning in March 2022 increased borrowing costs and made new multifamily construction less attractive. Some investors began to worry that the influx of new supply would weigh on future rent growth.
The seasonally adjusted annual rate for multifamily permitting fell 16% year-over-year in February. Developers pulled permits for 404,000 units at an annualized rate, down from a peak of around 700,000 units at the end of 2021.
Sun Belt markets had the steepest declines in new housing construction permits for February. Developers in Austin pulled 40% fewer permits than a year earlier, while Phoenix saw a 39% decline and Jacksonville, Florida, saw a 66% falloff.
The decline in new construction starts could be further exacerbated by rising costs associated with tariffs and President Donald Trump’s ongoing trade war.
The dynamic is providing a tailwind to the multifamily market as the record level of new construction is absorbed by tenants. The sector’s performance is highly varied across markets, but rents nationally grew by 1% in February, and the pace of rent growth is expected to accelerate as developers fill buildings that broke ground during the pandemic.
Some investors are making acquisitions today, operating under the assumption that today’s pricing doesn’t reflect the full extent of upside available through increasing rents. Morgan Properties, the largest private owner of multifamily communities, spent $510M this week to buy a 3,054-unit portfolio from Trilogy Real Estate Group.
Buyers can acquire a recently completed multifamily development for 30% less than it would cost to build today, quelling development and setting the stage for a tight rental market in a few years.
That has made acquisitions more attractive, with 83% of multifamily investors in a Berkadia survey last month saying they planned to buy assets this year.
“The little bit of our canary in the coal mine is our investment sales business, and that group seems to be incredibly busy right now,” Ernie Katai, Berkadia head of production for mortgage banking, told Bisnow last month.
