After a generationally high apartment construction boom, some developers are now finding that the economics no longer make sense on in-progress projects.

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Developers are sitting on an increasing number of undeveloped lots as market conditions for building apartments deteriorate, according to a new report.

After a generationally high apartment construction boom, some developers are now finding that the economics no longer make sense on projects for which they have already acquired land but have not completed, according to The Wall Street JournalThe primary culprits? Higher interest rates, rising construction costs, more difficult lending conditions and stagnating rents in some parts of the country.

The average amount of time a construction project spends between construction authorization and when construction actually begins has risen to nearly 500 days, a 45 percent increase from 2019, according to data from the property data firm Yardi Matrix.

Developers are also launching fewer projects overall. Multifamily housing starts fell to an annual rate of 322,000 units in April, the lowest rate since the onset of the pandemic in April 2020, according to the United States Census Bureau.

“We certainly are seeing a decline in construction,” Robert Dietz, chief economist at the National Association of Home Builders, told the WSJ. “Deals and financing have dried up.”

The decline was somewhat inevitable, the report notes, coming after a decades-high apartment building spree that resulted in almost half a million new apartments becoming available in 2023, with a similar number expected to become available in 2024, helping to cool rents in some markets.

Additionally, the lending environment has been soured thanks to the struggles in the commercial real estate sector, adding stress to the books of regional banks that typically provide financing for developers.

“Their current portfolios are getting marked down and they don’t have that much to lend,” David Frosh, chief executive of Fidelity Bancorp Funding, told the Journal. 

This has left developers with investors as their most viable pathway for raising funds, but investors, too, are feeling more cautious than they were when interest rates were lower and rent growth was more steady, making profits on apartment projects more of a sure thing.

“The numbers don’t add up,” Frosh told the newspaper.

This has resulted in some projects being delayed, even after construction has already begun, according to the report, such as a project by the Boise, Idaho, apartment developer Galena Opportunity that had to stop work with the project a third of the way completed when a major investor pulled out. That project remains stalled while the developer changes its plans to bring down costs, according to the report.

Some developers, like Seattle-based developer Tyler Carr, are seeking new solutions to keep their projects alive when funding runs out. Carr told the Journal he is making part of one of its stalled developments affordable housing so they can qualify for government tax credits.

“It’s been way more brain damage,” Carr told the newspaper. “But I see it as this great opportunity. I’m sinking my teeth into something new.”

Email Ben Verde

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