The Fed is in a pickle: Inflation is still elevated, so interest rates are still elevated -- and those higher rates are killing apartment/BTR construction starts ... which we need to help further bring down inflation.
The Fed wants to see lower inflation before cutting rates.
Builders and investors want to see lower rates before ramping up construction.
And everyone agrees we need more housing to further tame inflation.
Remember: The inflationary rent spike of 2021-22 spurred the 50-year high in apartment construction. That building spree led to flat-to-negative rents (for new leases) -- which is major driver in recent cooling of inflation as measured by CPI. Rent (not home prices) is the primary variable in shelter inflation, which is one-third of CPI's weighting.
Ironically, the low interest rate environment of the COVID era contributed to inflation AND contributed to taming inflation long before the Fed started hiking rents. How? Because apartment construction ramped up to record levels when debt was still cheap, then delivered into a developer-unfriendly environment of suddenly high rates and falling/flat rents. Ironically, Fed actions since then (rate hikes) did nothing to cool shelter inflation because it was already happening (but certainly impacted other categories of CPI).
So here we are in 2025. Multifamily starts have plunged the lowest levels in 10+ years. We're well passed reverting to pre-COVID supply levels, and instead trending toward post-GFC recovery era supply levels of the early 2010s.
If construction starts remain depressed and demand remains strong, we could see rent re-acceleration in 2026-27. There's little chance the Fed can change that trajectory at this point, even if they cut rates today, because it takes ~2 years to get projects planned and approved and built.
That's what this Wall Street Journal article gets into -- showing how investors basically everywhere on betting on renewed rent growth in 2026-27. We're not seeing that happen yet so far in 2025, but there are early indicators that it could be on the horizon -- with improving occupancy rates, robust demand, and plunging construction.
If rents do meaningfully rebound after 2+ years of flat-to-negative movement, rent increases -- not Fed rate cuts -- could the primary driver of the next construction wave. Regulatory reform and new/expanded incentivize programs could contribute, as well. But even then, that next supply wave would almost certainly be much smaller than the current one (for a variety of other reasons), and we wouldn't see much impact until 2028 at the earliest in terms of actual completions.
#rents #housing #inflation
https://lnkd.in/enYdzjMD
