Real Estate Trends: Construction Slows, But Rent Gains Momentum

In the ever-evolving landscape of the United States real estate market, a significant shift is underway. Recent reports from Institutional Property Advisors (IPA) and Marcus & Millichap have shed light on the impact of limited access to development capital on multifamily building activity across the nation. Economic volatility and rising interest rates have contributed to reduced lending from both large and small banks, leading to a slowdown in early-stage construction during the second quarter of this year.

As Greg Willett, First Vice President and National Director of Research at IPA, observes, "Frankly, I was a little bit surprised that the biggest slowdowns [in construction starts] were in Texas because these economies are performing the best." However, this slowdown is more pronounced in areas like Houston, Austin, and Dallas-Fort Worth, where groundbreaking starts fell compared to the same period in 2021 and early 2023.

But where there's a decline in construction starts, there's an opportunity for rent growth to outperform. Key building centers in Texas, despite their slowdowns, are poised for potential rent growth. This intriguing trend is a testament to the dynamic nature of the real estate market.

On the flip side, markets with less of a second-quarter slowdown in multifamily construction starts, such as Miami, Orlando, and Charlotte, have seen more stability, with decreases of less than 40 percent compared to the same period. Raleigh-Durham and Phoenix, among the 15 market core areas, have led in groundbreakings, with Raleigh-Durham showing no signs of slowing construction activity yet.

Greg Willett further notes, "It's the reverse of what I said about Texas. While there was significant construction, it wasn't as aggressive in Florida as it was in Texas or the Carolinas. It wasn't surprising to me to see a little bit less of a pullback in Florida."

Looking ahead, multifamily deliveries are expected to decline in early 2025, with over one million units currently under construction across the U.S. While this number is substantial, it's not evenly distributed, with half of these units concentrated in 15 markets, primarily across the Sun Belt and including cities like Philadelphia, Seattle, Los Angeles, and Washington, D.C. After this expected slowdown in the coming years, construction is anticipated to rebound.

As Willett explains, "If you look at the big picture, housing is under-supplied pretty much everywhere across the country." This shortage is expected to become even more pronounced in high-growth areas across the Sun Belt, leading to a significant resurgence in construction once the temporary lull passes.

As construction starts decline, the outlook for rent growth is optimistic. Increases are anticipated to become noticeable around the spring of 2024 and extend into 2025. While some markets are currently experiencing rent cuts, the expectation is for rent growth to return to a slightly positive trajectory in the near future.

In conclusion, the real estate landscape is marked by its ability to adapt to changing circumstances. The current slowdown in construction starts is not a roadblock but an opportunity for certain markets to thrive. As the industry navigates economic fluctuations and lending challenges, the resilience of the real estate sector remains a testament to its enduring appeal for investors, developers, and those seeking rental properties. This dynamic environment aligns with the expertise and services offered by Gallagher & Mohan, a Real Estate Knowledge Process Outsourcing company. Stay tuned for further updates on these fascinating developments in the real estate market with insights from Gallagher & Mohan, your trusted partner in real estate solutions.

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