In 2021, Seattle-based developer Tyler Carr embarked on a project to build 104 rental units in Boise, Idaho, responding to the city’s rapidly rising rents. Three years later, the land remains undeveloped, a stark illustration of the financial headwinds many developers face today. Carr cites rising interest rates and construction costs as the primary culprits making his project financially unviable.
The Apartment Construction Boom and Its Challenges
During what was one of the largest apartment construction booms in decades, many developers across the country have found themselves unable to start or complete projects. Higher interest rates, tighter lending conditions, and flattening rents are the main hurdles. From California to Florida, property companies are waiting for financing that might never materialize.
According to Yardi Matrix, the average time between construction authorization and the beginning of construction has surged to nearly 500 days, a 45% increase from 2019. The number of multifamily building starts fell to an annual rate of 322,000 units in April, the lowest since 2020, based on Census Bureau data.
Financing Woes and Construction Delays
While many developers hit snags before construction begins, some encounter problems midway. In downtown Phoenix, construction halted last fall on a 25-story apartment tower, leaving it incomplete as contractors filed claims for millions of dollars in unpaid work.
Robert Dietz, chief economist at the National Association of Home Builders, noted, "We certainly are seeing a decline in construction. Deals and financing have dried up."
The decline was somewhat expected after 2023 saw the completion of about half a million new apartments, the highest in 40 years. Analysts predict a similar number will be finished in 2024 based on current projects underway. However, the surge in new apartments has outpaced leasing capacity in some cities, causing rents to stagnate and investors to hesitate.
Banks' Reluctance to Lend
Banks are also contributing to the slowdown. Many regional banks are becoming wary of their existing commercial real-estate loans and are thus reluctant to extend more credit to apartment builders. David Frosh, CEO of Fidelity Bancorp Funding, explained, "Their current portfolios are getting marked down and they don’t have that much to lend."
This situation forces developers to seek more cash from investors. However, many investors are cautious, given the combination of flattening rent growth and the higher costs of construction and borrowing. "The numbers don’t add up," Frosh remarked.
Delays and Adjustments in Development Plans
In Worcester, Massachusetts, about a dozen apartment projects with more than 2,000 units are delayed. Joshua Lee Smith, a real-estate attorney, mentioned that many investors are hesitant due to high interest rates. This hesitation has stalled projects, including those offering both market-rate and affordable housing.
Cities like Worcester and Boise, which have attracted many newcomers due to their relative affordability, are experiencing significant delays in new housing construction. In Boise, the annual asking rent growth hit a record 25% in August 2021, and home prices in the surrounding county surged 79% from 2019 to 2022. Despite this demand, developers like Carr face hurdles.
Boise developer Galena Opportunity experienced a major setback in late 2022 when a significant investor withdrew from a 350-unit project. The project stalled with contractors filing claims for unpaid work. Galena is now seeking new partners and proposing cost-cutting measures to resume construction.
Adaptation and Optimism
To salvage his Boise project, Carr is reconfiguring part of the development into affordable housing to qualify for government tax credits, reducing the equity required to proceed. He hopes to begin construction by fall. Despite the challenges, Carr remains optimistic, viewing the situation as a unique opportunity to innovate. "It’s been way more brain damage," he said. "But I see it as this great opportunity. I’m sinking my teeth into something new."
The landscape for apartment developers is fraught with challenges, but some, like Carr, are finding ways to adapt and push forward, hopeful that better days are on the horizon.
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