Matthew Rothstein of Bisnow reports on the regional bank pullback from commercial loans in Q2, which is the lowest volume observed since record-keeping began in 2011. Further, loan extensions have spiked across all commercial property types, including multifamily, as a wall of debt maturities collide with higher interest rates.

Will Parker of the Wall Street Journal elaborates on the reduction in apartment construction, noting that the number of new apartment starts fell dramatically in 2023, marking a 41% decline year-over-year.

Source: WSJ (October 2023)

The National Multifamily Housing Council (NMHC) recently released its Quarterly Survey Of Apartment Construction & Development Activity for September 2023, highlighting the ongoing challenges in the sector. Here are some of the highlights:

• 88% of respondents reported experiencing construction delays over the last three months. 
• Respondents experiencing delayed starts cited the availability of construction financing (78% of respondents, up from 62% last quarter) as the cause.

Further, although lumber prices are declining slightly, builders in the multifamily space are seeing a rise in other material inputs.

Source: NMHC (October 2023)

Despite some of these headwinds, Freddie Mac released its Multifamily Apartment Investment Market Index (AIMI), which rose again in Q2 2023. According to Freddie Mac, a rise in AIMI shows an increasingly favorable environment for multifamily investment opportunities. Nationally, net operating incomes grew by 1.8%, but property prices declined for all markets by 10.1%. This is only the second annual decline seen since 2010.

Sara Hoffmann, director of Multifamily Research at Freddie Mac, notes: 

“This quarter’s results show that AIMI is rebounding…The index experienced a sharp annual decline in each of the prior four quarters, but a pullback in property prices and moderating mortgage rates are helping AIMI regain its footing. Over the past quarter, the index increased due to the confluence of net operating income growth, property price depreciation and lower mortgage rates relative to recent trends.”

Indeed, according to The Real Deal, wealthy investors continue to view multifamily as a strong investment choice. “In the past decade, these ultra-wealthy people and their firms have more than doubled investments in the multifamily market…The sector presents an area of growth, considering the fall in commercial property values and the outstanding need for housing.”

Zumper’s latest rent report shows that rent growth is essential flat, which would have been unheard of over the past few years. “This is a continuation of the trend we’ve observed over the last several months, as stratospheric pandemic-era rent hikes recede in the rear-view mirror and most markets settle into a new normal.”

Source: Zumper (October 2023)

Construction update

The National Association of Home Builders (NAHB) released a number of new reports last week related to the construction industry, starting with larger home construction. Ashok Chaluvadi reports that the number of 5000+ square foot homes decreased in starts to a total of 29,000 in 2022, down from 33,000 in 2021. Further, the share of new homes started in this category was also down, from 2.90% in 2021 to 2.85% in 2022.  This is down from the 2015 peak of 3.92%.  

Natalie Siniavskaia of NAHB reports on building lots, highlighting that values continued to rise in 2022 to a median national average of $56,000. In the East North Central division, lot values surged 42%, reaching a historic high of $71,000.

Source: NAHB (October 2023)

Nicole Bachaud of Zillow reports on construction starts in August, highlighting that:

• Housing starts fell to 1.28 million in August, down 11.3% from revised July 2023 figures and 14.8% from August 2022. 
• Single-family housing starts totaled 0.94 million in August, down 4.3% from July.
• Housing permits issued in August were up 6.9% from July and down 2.7% from a year ago, to 1.54 million. 
• 1.41 million homes were completed in August, up 5.3% from July and up 3.8% year over year.

Robert Dietz, also of NAHB, reports on new construction sales, reporting that new single-family home sales fell 8.7% in August. 

“Elevated mortgage rates and challenging affordability conditions pushed new home sales down to their weakest rate since March. Sales weakened in August with average mortgage rates above 7%. While some builders were able to offset that effect via mortgage rate buydowns, rates moved higher this month, suggesting the pace of new home sales will weaken further for September.”

Dana Anderson of Redfin reports on a recent survey showing the tendency of people to support more homebuilding as long as it’s not in their neighborhood. Almost 80% of survey respondents support policies that promote building more housing. That said, only 32% of those who are pro-building would “feel positive about an apartment complex built in their neighborhood, and 20% of them would be opposed to it.” 

Source: Redfin (October 2023)

Entering a buyer’s market?

Given high-interest rates, fewer buyers on the market means that sellers are seeing a decrease in demand despite high housing sales figures. As such, according to Dana Anderson of Redfin, more sellers are choosing to drop their prices amidst lower demand. 6.5% of homes for sale in September had a price drop, up from 5.8% a month earlier and a sharp increase year-over-year. 

Further, sales volume is dropping considerably, giving buyers the upper hand following years of seller market conditions.

Source: Redfin (October 2023)

Affordability continues to be one of the main reasons buyers sit on the sidelines. ATTOM Data Solutions recently released its Q3 2023 U.S. Home Affordability Report, showing that median-priced homes and condos are “less affordable in the third quarter of 2023 compared to historical averages in 99 percent of counties” nationwide. 

Filip De Mott of Yahoo! Finance reports on this topic, highlighting that 16% of sale deals in August were canceled, the highest rate since October 2022. Further, mortgage rates climbed as high as 7.23% last month, which is giving homebuyers cold feet.

Dana Anderson of Redfin highlights what this new reality means, specifically that homebuyers are now “waiting for homes to become more affordable and for more of them to hit the market. Mortgage rates are sitting near a two-decade high and U.S. home prices rose 3% year over year during the four weeks ending September 17, pushing monthly housing payments to an all-time high. Soaring costs have pushed pending home sales down 13% from a year ago. The total number of homes for sale is down 16%, as many homeowners stay put to keep relatively low mortgage rates.”

Jeff Tucker of Zillow comes to a similar conclusion in a fall market outlook, stating, “[t]he seasonal cooldown for the housing market is shaping up to be extra chilly this fall, swinging negotiating power toward buyers.”