Construction crews brought 1.2 million new apartment units to the market during the last three years, a record for any three-year period. And 2023? That will go down as another busy year, with developers expected to open 460,860 new apartment units by the end of December.
That is the good news from the annual apartment construction report released in late August by RentCafe.
According to RentCafe, the number of new apartment deliveries is expected to remain high until 2025, when the impact of the United States’ current economic challenges will finally slow new construction in the multifamily space.
And the last three years? RentCafe says that the United Stats has benefited from a multifamily construction boom not seen since the 1970s. The country is expected to see another 1 million new rentals through 2025.
Doug Ressler, manager of business intelligence at Yardi Matrix — the company that provided the data for RentCafe’s report — said that new households grew quickly after the pandemic as young adults moved out of their parents’ homes.
The work-from-home movement also prompted renters to form their own households to gain more living space for their offices, children and pets, Ressler said.
The challenge for renters? Almost two-thirds of the apartments built during the pandemic boom are clustered in just 20 high-growth metropolitan areas that account for about 41% of the total renter population in the United States.
This means that in much of the country, the new supply of apartments barely made a dent in the demand for new rental units.
At the same time, about 89% of the apartments completed during the last three years are high-end and expensive, targeting upper-middle-class and high-income renters. This makes it challenging for renters looking for affordable units.
The Dallas metropolitan area — which includes the city and its surrounding suburbs — has seen the most new apartment units built since 2020, with New York and Houston coming in second and third place.
On a purely city level, Austin has had the most apartments built in the last three years, followed closely by Houston.
Don’t, though, expect the apartment construction boom to continue indefinitely. RentCafe says that the growth in new rentals will slow after the current round of projects is completed thanks to the economic uncertainties currently hitting the country.
“The tightening of bank lending standards, combined with rising costs of construction materials, labor and land, has made mew projects harder to pencil,” Ressler said.
Ressler said that construction debt today is starting at 8% interest. Most banks only lend 60% or less of the total cost of a project. Ressler added that junior construction debt is even more expensive, with interest rates in the mid-teens.
“This financing structure can make it challenging for companies to initiate new construction projects unless they already have a substantial amount of capital on hand,” Ressler said.
Because of this, RentCafe predicts that the number of new apartments will drop from 484,000 in 2024 to 408,000 in 2025. New completions are expected to hit a low point in 2026 with about 400,000 new units added.
Yardi Matrix estimates then indicate that the pace of multifamily construction will gradually recover in 2027 and 2028.
What’s happening in the Midwest? According to RentCafe, Chicago is expected to add 6,159 new apartment units in 2023. For comparison, New York City is expected to add a far more robust 33,001 new multifamily units while Dallas is expected to add 23,659.
Nashville is expected to add 8,977 new apartment units in 2023, leading the Midwest. Activity is expected to be solid in Minneapolis-St. Paul, too, with RentCafe predicting that the Twin Cities will add 6,607 new apartment units this year.
Chicago ranks as the 20th busiest metro area for apartment growth in 2023, while the Twin Cities area ranks 19th. Nashville came in 15th, the highest-ranking of any Midwest market.
In Texas, the Dallas metropolitan area claimed the second spot in RentCafe’s ranking of the business 20 U.S. metro areas for new apartments in 2023. Austin came in third while Houston ranked eighth.
Not surprisingly, the New York City metropolitan area topped RentCafe’s list.
Between 2020 and 2022, Chicago saw 15,356 new apartment units built, ranking 10th among the top 20 cities tracked by RentCafe. Nashville saw 12,085; Columbus, Ohio, 9,944; and Minneapolis 9,569.
In Texas, Austin led the way with 29,115 new apartment units added between 2020 and 2022. Next came Houston, with 28,423; San Antonio, with 15,651; Dallas with 13,741; and Fort Worth with 9,672.