The Housing Shortfall and What's Ahead for Multifamily Housing Developers

Anyone who has been tuned in to the multifamily housing market over the past several years is aware of the demand for apartment units, including affordable housing options. Supply has come up short in meeting demand for years now.

While this has been a source of concern for tenants looking for the next place to call home, for owner/developers, it represents an opportunity. High demand has driven up rents and driven down vacancies. Profits are good, of course, yet the ongoing shortage is a mixed bag. Though it has resulted in opportunity for investors, the economic realities of our time have also posed complexities.

"Multi-Housing News" recently explored these issues and the possible pathways the multifamily housing and construction industries may take to navigate through them in Special Report: The Apartment Shortfall. Because these matters have vast implications for both tenant prospects and owner/developers, I want to share the insights I've gleaned from the report and our experience and observations as professionals at the forefront of the design-build evolution of multifamily construction.

1. The housing shortfall is significant.

A study by the National Multifamily Housing Council and the National Apartment Association reveals that the industry needs to add 4.3 million new multifamily housing units within the next 11 years or so. At our current rate of construction, analysts are predicting a 600,000-unit shortfall by 2035. Notably, from 2015 to 2020, the market lost 4.7 million affordable multifamily housing units because of underproduction. Overall, rentals at lower price points are fewer as the market migrates toward attracting affluent renters and renters by choice.?

2. A pricing shift may be on the horizon.

Data shows a shift in the market, with average rents moderating slightly at the end of 2022. Though still higher year-over-year, the increase of 7% in November was dwarfed by those over the previous year and a half.

3. Homeownership remains out of reach for many.

Rising mortgage rates, limited inventory, and increasing property values have nudged many would-be homebuyers to the sidelines. These realities, paired with the skyrocketing cost of owning a home, have left many, including wannabe first-time buyers, seeking rental housing instead. The result: demand for rental housing is projected to stay robust for the foreseeable future.

4. Inflated construction prices pose a challenge.

The cost of constructing multifamily housing is up, and the cause is multifactorial. From inflationary pressures to clogs in the supply chain to construction workforce shortages and more, there is much for developers and investors to overcome to meet the anticipated housing need in the long term.

5. Regulatory burdens represent another hurdle.

Multifamily development continues to be slowed by bureaucratic red tape. Developers face zoning challenges, affordability mandates, building codes, and studies and site work fees. Altogether, these can become seemingly insurmountable hurdles, raising development costs and slowing or disincentivizing development in some areas, often those that need multifamily housing the most.

6. Financing

Developers facing these financial challenges can still advance multifamily housing projects by innovatively leveraging various financing methods to help “gap” financing shortfalls that may be encountered.

• One strategy involves pursuing grants specifically designed to support housing development. These grants, often provided by government entities or private foundations, can significantly reduce the barriers to obtaining traditional financing or give you the lift to meet stringent loan-to-value ratios.
• Tax Increment Financing (TIF) offers another avenue. By capturing the future tax benefits of an improved property, TIF can be a key contributor to the project financing and, in some cases, provide upfront funding necessary for development.
• Tax abatement programs can be another tool. These programs temporarily reduce or eliminate property taxes, easing the financial burden during the crucial development and stabilization phases of multifamily projects.

Using, and combining, these financing solutions allows developers to navigate the complexities of the current economic climate and continue to contribute to the growth of multifamily housing.

The multifamily housing market is most certainly under pressure and in transition, and those of us in the industry continue to closely monitor the emerging realities for developers and investors. When it comes to controlling costs so development can be penciled out, starting early is key. Wise developers who hope to build in the next year and a half should be rolling on the process now to get a head start and gain some traction on lead times and construction workforce shortages. When it's time, those of us in the design and build sector are here to help.