Multifamily Development – Bonus Edition!
Hey Team,
This week I’ve been pondering the big questions of life. Why do we almost skip Thanksgiving for Christmas? Why do we not have Thanksgiving songs? Real Christmas tree or fake Christmas tree? And…what’s going on with multifamily development?
I’m still working through the first couple of questions, but I’ve got some thoughts on the last one. Previously we’ve talked about the extraordinary wave of multifamily construction that defined 2022-2024. In fact, 2024 marked a 40 year high in multifamily deliveries peaking at around 700k units. Since then, deliveries have been retreating, giving way to a sharp national reset in the development pipeline, which we are seeing in 2025 and will continue in greater force in 2026.
Why the slowdown??
Market Cycles: This may seem obvious, but we can’t forget that all markets move in cycles. Multifamily development is no exception.
Financing Constraints: Construction financing is more difficult to secure due to tighter underwriting, reduced leverage, and higher debt yields. The all-in cost to borrow remains elevated as compared to 2020-2022. Consequently, starts have declined and only the most well capitalized groups can move forward.
Softness in the Market: Economic headwinds, oversupply, and the lingering effects of inflation have caused the multifamily market to soften over the past few years. We’re seeing this in reduced asset prices (expanded cap rates), weaker rent growth (or in many markets rent reductions), heavier concessions, and elevated vacancy. This softness negatively impacts developer’s proformas making new projects hard to pencil.
Constructions Costs: Although construction costs have normalized from peak levels, materials and labor expenses remain historically high, eating into developer’s margins.
What does this mean for us??
Focus Shift to In-Place, Cash Flowing Assets: With less favorable development economics and soft market conditions, in place product may provide the most attractive risk adjusted returns
Supply Decreases = Rent Increases: The dramatic drop-off of new apartment supply sets the stage for increased demand in many growth markets, creating positive rent growth.
Valuations Improve: As rent growth returns and vacancy falls, property financials will improve which will strengthen property values.
Discipline > Fear + Greed: While the market is largely driven by fear and greed, we believe there is a unique opportunity to make disciplined investments in multifamily based on increased demand and strong/recovering market fundamentals. I mentioned this in our last newsletter, but a good point is worth making twice.
Hopefully, you found this helpful and now you won’t need to lay awake at night pondering the big question of multifamily development. Jokes aside, Ryan and I hope you enjoy time with your family and friends this Thanksgiving and Christmas!
PS, real or fake Christmas tree? 👀