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U.S. Apartment Construction Takes a Hit in 2023 With Rent Growth Potential in the Near to Mid-Term

Seattle, Portland, San Francisco, Oakland, San Jose, Los Angeles, Orange County, San Diego, apartment construction

By The Registry Staff

2023 has unveiled a dramatic transformation in the U.S. apartment construction sector, with significant reductions in new starts, especially in historically robust regions like Texas. Amid tightened access to development capital, fluctuating rent growth, and rising operational expenses, key markets have reported stark downturns, setting the stage for potential rent increases in the coming years.

A Snapshot: Construction Starts Plummet

2023 brought with it an unexpected downturn in apartment construction starts, with projections indicating a sharp reduction of almost 50 percent compared to 2021 and 2022 levels. By the second quarter, this prediction was confirmed, with starts in key markets falling even below this forecast.

The primary culprit? A conspicuous decline in development capital access. Major banking institutions reduced capital allocations for real estate in early 2023. Simultaneously, several regional banks went under, prompting a strategic shift among smaller banks. The slowdown was exacerbated by muted rent growth and escalating operational expenses, particularly in the realm of insurance, according to a recent Institutional Insights, Multifamily Market Intelligence Report by Institutional Property Advisors.

Sun Belt Dominates, But Starts Vary Across Regions

While over a million apartment units are under construction across the U.S., activity is unevenly distributed. A substantial half of this activity is concentrated in 15 markets, with the Sun Belt emerging as the primary building hub. However, cities like Washington, D.C., Los Angeles, Seattle, and Philadelphia aren’t far behind.

The construction starts within these 15 core building locations were drastically lower at 30,800 units in Q2 2023, marking a 52 percent reduction from the nine-quarter average between early 2021 and early 2023. The peak during this period was 81,500 units in Q2 2022.

Texas: A Surprising Decline Amidst Strong Job Market

Perhaps most astonishing is the downturn in Texas, a state synonymous with job creation and robust apartment demand. Construction starts plummeted by 79 percent in Houston, 74 percent in Austin, and 67 percent in Dallas-Fort Worth compared to the 2021-2023 average. Given that Dallas-Fort Worth leads in job additions, this decline appears counterintuitive. But this factor suggests Texas metros, especially Dallas-Fort Worth and Houston, might witness a rapid revival in apartment rent growth in the near future.

A Glimpse at Other Metros

Other significant reductions in the 15-market segment include Philadelphia (66 percent), Denver (62 percent), and Washington, D.C. (57 percent). Meanwhile, Los Angeles, Seattle, and Atlanta experienced drops closer to the average, at 52 percent, 51 percent, and 50 percent, respectively. Nashville and Phoenix saw less pronounced declines, with Miami and Orlando witnessing the smallest reductions.

Interestingly, despite these drops, Phoenix stood out alongside Raleigh-Durham, Charlotte, and Dallas-Fort Worth for initiating the most projects in Q2. Raleigh-Durham was unique in showing no slowdown, surpassing its 2021-2023 quarterly average by about 150 units.

Looking Ahead: The Rent Growth Comeback

Considering that apartment projects typically span 18 to 24 months, we can expect delivery volumes to decline significantly by the latter half of 2025. This reduction in new supply should stimulate rent growth as early as spring 2024, setting the stage for robust price hikes in 2025.