Home construction is weak, but apartment construction is booming
Home construction is weak, but apartment construction is booming
We learned this week that the number of new single-family home construction projects fell last month, according to the Commerce Department. Building permits fell, too. None of that is great news for a housing market that’s fundamentally undersupplied — which, by the way, is one of the main reasons why demand for single-family homes is falling in the first place.
But single-family homes aren’t the only type of housing out there. Apartment construction, on the other hand, has been rising. In fact, Goldman Sachs said more apartments are being built now than during any time since the 1970s.
Apartment builders have been facing a lot of the same problems that single-family home builders have been dealing with. Building supplies are more expensive, labor is in short supply and the interest rates on construction loans are rising.
“And that’s just one more impediment towards delivering housing supply,” said Brad Dillman, chief economist at the apartment developer Cortland.
He said those costs are only worth it to a developer if a home’s selling price can cover those costs, or if rents on an apartment building are high enough.
“So when rents jump all of the sudden, it’s very easy to see the profitability of turning around and starting to develop,” Dillman said.
Rents did jump during the pandemic, and they’ve stayed high.
Meanwhile, prices for single-family homes have been falling this year, since rising mortgage rates are causing a lot of potential buyers to hold off.
That’s only increased demand for apartments, said Chris Mayer, a real estate professor at Columbia Business School.
“You know, rents aren’t driven by interest rates,” Mayer said. “And if anything, the rise of interest rates pushes people out of the owner-occupied market, into the rental market.”
As the demand for new apartments increases, so does the incentive to build more. And that trend is likely to continue.
“You know, we’re going to see 40-year highs in new apartment supply in 2023,” said Jay Parsons, an economist with the real estate data firm RealPage. “And that wave is going to last into 2024.”
As a result, Parsons said renters could get some relief.
“They’re going to have a lot more options, and they should see much more competition, as there’s more units completing,” he said.
But Parsons said the type of apartments that’ll be coming online are mostly ones that developers decided to build when costs were high.
“These are generally more expensive rental properties, and they’re competing for the top tier of the market, in terms of income levels,” he said.
The construction of more affordable apartments, Parsons said, will likely require government aid.
Stories You Might Like
There’s a lot happening in the world. Through it all, Marketplace is here for you.
You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible.
Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.
