At a seasonally adjusted annual pace of 1.33 million units, January’s rate of starts was down 14.8% from December and 0.7% from January 2023. The slowdown was likely propelled in large part by the frigid weather that gripped much of the country during the month, making it harder to break ground on new construction. Economists polled by Reuters had predicted a rate of 1.46 million starts, leaving January’s actual figure far short of expectations.

Both single-family and multifamily starts declined, although the month-over-month single-family backtrack of 4.7% paled in comparison to the stark 35.6% plummet in multifamily building. Multifamily starts are notoriously volatile on a month-to-month basis, but Robert Dietz, chief economist at the National Association of Home Builders (NAHB), said that the sector looks due for more of the same throughout the year.

“Multifamily construction is forecasted to post a large decline in 2024 as the number of units currently under construction is near the highest level since 1973,” Dietz said. “Meanwhile, single-family production, which is currently running at a 1-million-unit annual rate, is roughly in line with builder sentiment that remains right below a breakeven level, according to our latest surveys.”

The NAHB/Wells Fargo Housing Market Index, which tracks builder confidence in the market for new single-family homes, rose four points to a reading of 48 in February — the index’s highest level since August of last year. The stubborn shortage of listings that has held back the resale market continues to boost new home demand, and expectations of an eventual interest-rate lowering cycle are fueling optimism.

“The improvement in builder sentiment has been driven by the gradual decline in mortgage rates since the fall of last year,” said Odeta Kushi, deputy chief economist at First American Financial Corp. “Additionally, builders continue to benefit from a lack of resale inventory. They also can offer incentives, such as mortgage rate buydowns or even price cuts, to entice buyers. When there are no suitable existing homes for sale, a new home at the right price can be a good alternative.”

The NAHB forecasts a “modest” gain in single-family starts for full-year 2024, Dietz said. Thus far, that prediction is supported by early-year permitting data, with authorizations of new single-family construction at a pace of 1.02 million units in January, up 1.6% from December.

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Despite the month-over-month decline, December still saw a yearly uptick of 7.6%. The monthly decrease was, in large part, a correction from the enormous 15.4% surge in starts during November, which was likely brought about by unseasonably warm weather pulling construction forward.

Single-family construction accounted for most of the pullback, decreasing 8.6% from November’s revised figure to a rate of 1.03 million units. Single-family starts for full-year 2023 totaled roughly 945,000 units, a 6% annual drop.

Still, single-family building generally improved as the year went on, with builders deploying discounts and buydowns to counter the rising interest rate environment. And even with the monthly decline, single-family starts remain solid, said Alicia Huey, chairman of the National Association of Home Builders (NAHB).

“Mortgage rates steadily fell below 7% in December, and lower rates combined with a lack of existing inventory in most markets helped to keep single-family production above a one million-unit annual pace,” Huey said. “And the fact that our latest surveys showed a big increase in builder confidence is an indicator that we can expect housing starts to improve in the coming months.”

Indeed, builders seem optimistic for the months ahead, with the NAHB/Wells Fargo Housing Market Index leaping by 7 points in January. It’s the second straight improvement in the index, which tracks builders’ confidence in the new single-family home market.

“The jump in single-family permits and the upward trend in single-family housing starts alongside improving builder sentiment is an encouraging sign for the housing market,” said Odeta Kushi, deputy chief economist at First American Financial Corp. “While headwinds remain, notably ongoing affordability constraints, the green shoots of a housing recovery have emerged alongside lower mortgage rates.”

With rates trending downward, reignited demand for new homes already appears to be encouraging builders to ramp up some more. Single-family permits grew to an annualized rate of 994,000 in December, the fastest pace since May 2022.

“A rise in single-family permits is a sign that we will see the single-family market pick up steam in the near future,” said Danushka Nanayakkara-Skillington, assistant vice president for forecasting and analysis at the NAHB. Her prediction came with a caveat, however; due to tighter financing, Danushka Nanayakkara-Skillington expects weakening in the multifamily market.

Multifamily starts, including apartment buildings and condos, grew 8% to a pace of 433,00 units in December. But higher capital costs and an active pipeline of under-construction projects have already taken a bite out of multifamily building, with full-year multifamily starts in 2023 down 14.4% year over year. And while multifamily construction is infamously volatile, the average rate of multifamily starts in the fourth quarter of 2023 was 412,000 — almost 26% lower than in the same period one year prior.

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These even go as far as redeveloping entire districts. In Somerville, Massachusetts, 20 acres of the Union Square neighborhood is being redeveloped as part of a master plan. Centered around a new light rail station to connect the area to downtown Boston and beyond, the $2 billion project will bring 2.4 million square feet of space crafted for companies in the life sciences, technology, arts and innovation sectors.

Only 2 miles away in Boston’s Allston neighborhood, home of Harvard Business School, a 9-acre mixed-use development is underway. The Enterprise Research Campus will include two new laboratory buildings; hundreds of apartment units; hotel, retail and restaurant space; and a sustainably built conference center.

Outside of Boston, smaller developments are underway. On the Massachusetts border with New Hampshire, the city of Haverhill is redeveloping 3 acres of historic buildings and vacant property in its downtown. Under the tutelage of preservation society Historic New England, Haverhill is slated to gain new retail and commercial space, live-work spaces for artists, housing and a hotel.

Rise Development is planning a $100 million movie and TV studio in the Boston suburb of Braintree in its effort to create a “Hollywood East.” And in Concord, New Hampshire, nearly 1,000 units of housing are being planned for a 135-acre, mixed-use development along the Merrimack River.

Small towns are also getting in on adaptive reuse. In rural northern Vermont, the town of Hardwick is saving its iconic Yellow Barn. The historic building will be transformed into retail space, with a new food and agricultural business center to be constructed next door, providing community cold-storage and warehouse space for farmers.

The overall economy in New England was strong in 2023, with low unemployment rates and stable gross domestic product (GDP) growth. According to August 2023 data from the Federal Reserve Bank of Boston, overall employment in New England has fully recovered from the COVID-19 pandemic.

The leisure and hospitality sector across these states is about 6% behind pre-pandemic levels. But unemployment rates are below the U.S. average across the board, with no state topping 3.5%. Vermont (2%) and New Hampshire (2.1%) had some of the lowest jobless rates in the country as of October. ●

The vacancy rate for industrial properties in Greater Boston continued to climb in the third quarter of 2023, but net absorption rose sharply, according to Cushman & Wakefield. Vacancies reached 6.9%, partially due to a robust pipeline of new construction. Nearly 4 million square feet (msf) of inventory was delivered in the first three quarters of last year, with another 4.7 msf still under development.

Preleasing activity was slow at that time, with the pipeline only 17.7% leased. The impact is far from devastating, however, as Cushman & Wakefield predicted that even if the rest of the delivered inventory for 2023 went completely unleased, the vacancy rate would rise by a modest 60 basis points.

The 495 West submarket, encompassing Boston’s far western suburbs, saw the most marked improvement. The submarket accounted for 51% of Greater Boston’s total quarterly occupancy gains, lowering its vacancy rate by 440 basis points to only 2.2%.

What the Locals Say

The market is tough right now. The issue that we’ve seen on our end is not that rates are too high, it’s just that they went from historic lows to this level way too fast. It’s hard for business owners, now more than ever, to weigh purchasing over leasing.

Here in Boston, we see fairly drastic differences within neighborhoods. For instance, in the Back Bay, the office market has been strong. It’s insulated because it’s a highly desirable area with a live-work feel and a strong residential component. But the Financial District has been struggling and has seen high vacancy rates continuing after the pandemic. On the retail side, it’s similar. There are some areas that are doing well, with relatively low vacancies, whereas downtown — since the daily influx of workers is much lower than it was before — it’s harder for retail businesses to sustain themselves. So, there’s higher vacancy downtown.

Investors, developers and businesses do consistently want to be in Boston because there are so many industries and institutions located here. There are lots of highly regarded colleges and universities like Harvard, MIT, Boston University and others, as well as internationally recognized hospitals.

Life sciences are a big thing in Boston right now, with ground-up developments and office conversions. There’s a constant influx of people to the city, and on the investment side, we seem pretty well insulated from giant upturns and downturns.

3 Cities to Watch

New Haven

Connecticut’s second-largest city is home to nearly 140,000 people. Steeped in history, New Haven’s centerpiece is Yale University. The university and its attached hospital and medical system are the city’s largest employers, combining for about 45,000 jobs. Biotech is another key industry in New Haven, spurred by the redevelopment of former factories into a scientific research campus. Advanced manufacturing and food services are economically significant too.

Springfield

The “City of Firsts” is the third largest in Massachusetts and is famous for innovation. Springfield is the birthplace of basketball and of Dr. Seuss. It’s also the home of the first American-made automobile and the nation’s first military armory, an important facility during the Revolutionary War. Firearms manufacturer Smith & Wesson traces its roots in the city to 1856. Other major industries in the metro area include health care, aerospace and financial services.

Portland

Artsy, outdoorsy Portland is Maine’s most populous city. Its metro area is home to 550,000 people. Originally a fishing and trading settlement, Portland still boasts a working waterfront in the heart of a trendy downtown. Portland has seen intense development interest in the past several years, including new housing, luxury hotels, a convention center, a 10-acre waterfront neighborhood, and the redevelopment of a famous downtown office building into modern mixed-use space.

Sources: Boston Real Estate Times, Business Wire, City of New Haven, City of Springfield, Connecticut by the Numbers, Connecticut History, Engineering News-Record, Federal Reserve Bank of Boston, Maine Business Magazine, National Parks Service, Patch.com, Portland Press Herald, Springfield Regional Chamber of Commerce, Visit Portland, WWLP-TV

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That’s up 14.8% month over month and up 9.3% year over year, according to new data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The surge shattered expectations, with economists polled by Reuters predicting that starts would slip to 1.36 million. Uncharacteristically warm November weather may have contributed to the uptick by allowing more projects to break ground and move forward, along with lower mortgage rates that likely encouraged buyers and soothed affordability concerns.

Single-family starts drove the bulk of the gain, bounding 18% from October to a pace of 1.143 million units in November. That’s the fastest rate of starts since April 2022 and pushed the streak of single-family building increases to three consecutive months. Single-family starts remain 7.2% lower on a year-to-date basis, but the seasonally adjusted annual pace of single-family starts is now up by 42.2% annually.

Robert Dietz, chief economist for the National Association of Home Builders (NAHB), said that November’s single-family gain may end up being amended downward upon review, but he still sees more growth ahead.

“The single-family starts figure is remarkably strong, and we would not be surprised to see this figure revised lower or fall back slightly in the next month, given the nearly 20% rise in November,” Dietz said. “NAHB is forecasting an approximate 4% gain for single-family starts in 2024, as mortgage rates settle lower, economic growth slows and inflation moves lower.”

Multifamily construction was up too, climbing 8.9% to an annualized pace of 404,000 units. Despite the gain, multifamily building remains pointed on a downward trajectory, with starts down 33.7% year over year. The under-construction multifamily pipeline is robust, however, with the most in-process projects nationwide since the early 1970s.

Combined with a glut of new deliveries in many major rental hubs, the busy pipeline has discouraged many developers from starting new multifamily projects. New groundbreakings have also been limited by high capital costs, although that barrier may grow less cumbersome in the months ahead with interest rates on the wane.

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According to the newest data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, overall housing starts rose 1.9% month over month, with single-family starts up 0.2% and multifamily starts up 4.9%. Single-family starts grew to a seasonally adjusted annual rate of 970,000 units, while the prior month’s figures were revised upwardly from the originally reported 963,000 units to 968,000.

The single-family sector’s modest uptick presents an interesting barometer, depending on your point of view. Considering the persistent need for more housing inventory, a pessimistic observer could bemoan the nearly flat month-over-month numbers, which were hindered by the ongoing elevated interest rate environment. A more positive read is that the obstinate lack of inventory continued to fuel new construction in the fall despite housing affordability that has eroded to the lowest level in recent memory.

“The construction data in October continue to reflect that despite multidecade lows for housing affordability, the market continues to lack attainable inventory that only the homebuilding industry can provide,” said Robert Dietz, chief economist for the National Association of Home Builders (NAHB). “And with the 10-year Treasury rate now back in the 4.5% range, we are forecasting gains for single-family homebuilding in the months ahead and an outright gain for construction in 2024.”

Permitting gained steam as well, with authorizations of new single-family home edging up 0.5% to reach an annualized rate of 968,000 units. That’s the highest level since May 2022, although single-family permits remain down 10.6% on a year-to-date basis. Multifamily permits were up 2.2% to an annualized pace of 519,000 units.

Downside risks remain scattered about, including heightened construction costs and growing concerns about potential regulations, such as a proposal to tighten building code requirements for properties financed by Federal Housing Administration (FHA) loans. Such issues, coupled with the big whammy of high interest rates, have pushed builder confidence to their lowest level this year. The NAHB/Wells Fargo Housing Market Index (tracking builder sentiment in the market for newly built single-family homes) dropped by 6 points in November, its fourth straight monthly decline.

“The rise in interest rates since the end of August has dampened builder views of market conditions, as a large number of prospective buyers were priced out of the market,” NAHB Chairman Alicia Huey said. “Moreover, higher short-term interest rates have increased the cost of financing for homebuilders and land developers, adding another headwind for housing supply in a market low on resale inventory.

“While the Federal Reserve is fighting inflation, state and local policymakers could also help by reducing the regulatory burdens on the cost of land development and homebuilding, thereby allowing more attainable housing supply to the market.”

Dietz, however, remains encouraged.

“While builder sentiment was down again in November, recent macroeconomic data point to improving conditions for home construction in the coming months,” he said. “In particular, the 10-year Treasury rate moved back to the 4.5% range for the first time since late September, which will help bring mortgage rates close to or below 7.5%. Given the lack of existing home inventory, somewhat lower mortgage rates will price in housing demand and likely set the stage for improved builder views of market conditions in December.”

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“Aggregate costs serve as the structural foundation upon which a project is built, but they also serve as a financial foundation for how budgets are built.”

Having a firm grasp on the aggregate costs and their influence on construction financing will give commercial mortgage brokers a realistic idea of how much money borrowers will need to complete their projects. When embarking on a project, it’s essential to consider all the expenses that fall under the umbrella of aggregate costs. These include direct and indirect construction costs.

Thorough understanding

Direct construction costs encompass the expenses directly associated with the physical construction of real estate assets. These include materials, labor, equipment and any other resources required to bring the project to life. It is vital to carefully analyze these costs to ensure accurate budgeting and avoid any financial surprises that may arise during the construction process.

It is equally important, however, to consider the indirect costs that are often overlooked but can significantly impact the project’s budget. Pre-construction planning, project permits, legal fees, insurance and licenses are necessary for compliance and approval from local authorities.

Each of these components plays a pivotal role in the successful completion of the project and the overall financial health of the stakeholders involved. These costs can vary depending on the project’s location, size and complexity. It is crucial for mortgage brokers to make sure that the necessary funds are allocated for permits, to avoid delays and legal complications that may arise if proper documentation is not in place.

Construction projects often involve complex legal contracts, negotiations and documentation. Hiring legal counsel to navigate these intricacies is essential to protect the interests of all parties involved. These fees can also vary depending on the scope of the project.

Insurance is yet another vital component of aggregate costs in construction financing. Ground-up development projects are inherently risky, with various potential hazards and unforeseen circumstances that may arise. Adequate insurance coverage is necessary to protect against these risks and provide financial security in case of accidents, property damage or other unforeseen events.

Look closely

By considering these expenditures, commercial mortgage borrowers and their broker partners can form a comprehensive budget that reflects the true scope of the project. This ensures that the project’s financing needs align with the actual costs involved, reducing the risk of budget shortfalls and financial strain throughout the construction process.

Lenders also play a crucial role in construction financing by analyzing aggregate costs. Lenders carefully evaluate the financial feasibility of a construction project before approving financing. By understanding the complete financial picture, lenders can assess the level of risk associated with the real estate project and determine the appropriate loan size.

Aggregate costs serve as the structural foundation upon which a project is built, but they also serve as a financial foundation for how budgets are built. By meticulously calculating all the expenses, brokers and borrowers can have a realistic understanding of what it will take to bring the owner’s vision to life. Skimping on this crucial phase can potentially lead to financial trouble down the road.

For instance, the cost of materials can vary significantly depending on the type and quality required for the project. Can this project use recycled materials? How far is the nearest quarry or gravel yard? How soon can the materials be delivered? These are all questions that must be considered.

Project owners must research suppliers, compare prices and factor in potential price fluctuations to accurately estimate these components. Similarly, labor costs need to be carefully assessed by considering factors such as wages, overtime and any specialized skills required for the project.

Lender scrutiny

Lenders will also closely scrutinize these costs to ensure that the loan amount aligns with the project’s financial requirements. If the aggregate costs exceed the loan amount, project owners may have to secure additional funding or reconsider certain aspects of the project to maintain financial viability.

Brokers and borrowers need to present a comprehensive and well-researched budget to lenders when seeking financing. This includes providing detailed breakdowns of the aggregate costs, along with supporting documentation and estimates from reputable sources. Lenders need to have confidence in the accuracy and feasibility of the budget before approving a loan.

Moreover, they must consider the potential impact of inflation and market fluctuations on aggregate costs. These factors can significantly affect the overall budget and loan size. Therefore, it’s essential to regularly review and update the budget throughout the project’s life cycle to account for any changes in costs.

There are also risks associated with underestimating aggregate costs. If the project experiences unexpected expenses or cost overruns, it could lead to financial strain and potential delays. Therefore, it is advisable to include contingency funds within the budget to mitigate any unforeseen circumstances that may arise.

Lender considerations

As mortgage brokers work with clients to evaluate potential loan options for their construction projects, it is paramount to consider how aggregate expenses impact the financing landscape. Different lenders have varying criteria for evaluating loan requests and consider a range of factors such as creditworthiness, project feasibility and, most importantly, aggregate costs.

Project owners must thoroughly understand how lenders assess aggregate expenses to present a well-informed loan proposal. This understanding allows project owners to demonstrate their ability to manage financial risk effectively and increases their chances of obtaining financing. By aligning the loan scope with the aggregate expenses, borrowers can show lenders that they have a comprehensive understanding of the project’s financial requirements.

One key aspect that lenders consider when evaluating aggregate expenses is the breakdown of costs. Lenders want to see a detailed breakdown of each expense category, including an itemized list of materials, labor rates and other associated costs. This level of detail allows lenders to assess the accuracy and feasibility of the estimated expenses.

They will also examine the project’s timeline and schedule when evaluating aggregate expenses. Construction projects often have specific timelines and deadlines, and lenders want to ensure that the loan amount is sufficient to cover the expenses within the given time frame. Lenders may also evaluate the project owner’s track record and experience in managing construction projects. Lenders want to see evidence of the developer’s ability to effectively manage costs so that projects are delivered on time and on budget.

Understanding how lenders assess aggregate expenses can be crucial for project owners seeking construction financing. By offering a comprehensive and compelling loan proposal that covers all the bases, mortgage brokers and borrowers increase their chances of obtaining financing and securing the necessary resources for successful completion.

● ● ●

Aggregate costs play a primary role in calculating commercial real estate project budgets and determining loan sizes in construction financing. By bolstering their knowledge and awareness of these financial dynamics, mortgage brokers and project owners can navigate the intricacies of construction financing with confidence, allowing them to make informed decisions, increase their chances of financing approval and realize successful construction projects. ●

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In 2006, the median age of a home was 31 years, according to numbers compiled by the National Association of Home Builders (NAHB). The age of existing homes shot up rapidly after the Great Recession.

“Contractors have a tendency of flip-flopping between remodeling and new construction based on what earns them the most money.”

– Todd Tomalak, principal of building products, Zonda

“The housing stock is getting older and the reason is not mysterious,” says Paul Emrath, NAHB’s vice president for survey and housing policy. “We’ve just been building new housing at below-normal rates pretty consistently since about 2008.”

From the 1960s through the 1990s, builders produced about 1.5 million housing units per year. Since the Great Recession, however, they’ve produced far fewer, Emrath says. While home construction activity has risen in recent years, it’s only resulting in about 1.4 million new homes annually, about 100,000 shy of the historic norm. Homebuilders should be churning out even more homes to overcome the existing shortfall and account for population growth, Emrath says.

With fewer new homes coming onto the market, that’s pushed the typical age of an existing home dramatically higher. So, it’s no surprise that the U.S. is in the midst of a remodeling boom. Zonda’s Todd Tomalak says that the years between 2020 and 2030 may well be remembered as “the golden age of remodeling.”

“It’s a number of things that are all coming together at the same time in a way we haven’t seen in the data before,” says Tomalak, the company’s principal of building products.

In addition to aging homes, he also cited other reasons for the remodeling boom. For one, homeowners are sitting on record levels of equity. There’s also the lock-in effect, making owners with low interest rates unwilling to move. Some people purchased rashly during the COVID-19 pandemic and are stuck in homes they dislike. And in the past decade, major remodeling projects per household — as opposed to total dollar volume — were below the levels of previous decades.

Last year, mortgage lenders authorized $275 billion in home equity lines of credit (HELOCs) to U.S. homeowners. That’s the highest total since 2007, says CoreLogic chief economist Selma Hepp. The total amount authorized this year is estimated to decline to $178 billion as higher interest rates deter potential borrowers. Still, homeowners are expected to spend $486 billion on home renovations and repairs this year, the largest amount on record.

“Over the last few years, we’ve seen huge amounts of money spent on improvements and repairs,” Hepp says. “We do believe that number is sort of peaking and will decline slightly from that peak over the next year. Even with that decline, we’re looking at some of the highest levels that we’ve seen since the 1990s.”

Emrath agrees that the number of remodeling projects should decline soon. “It’s been so strong, that was a trend that couldn’t keep going forever,” he says.

Tomalak also believes there will be a lull, noting that homeowners have burned through money saved during the pandemic, credit card balances are rising and higher interest rates are cooling demand for HELOCs. But he thinks that remodeling will pick up after a brief pause and remain elevated through the rest of this decade.

If a homeowner dislikes their property, they can either move or remodel. In the 1990s, homeowners were 4.3 times more likely to move than to remodel, according to census data. By 2021, however, the average homeowner was 1.3 times more likely to move than remodel — a nearly equal likelihood to stay put rather than sell.

Tomalak likens it to holding a beach ball underwater. Without new homes to move into, owners will continue renovating. So, when will it pick up after the lull? “You tell me when rates begin to come back down,” Tomalak says. “If we kind of take what’s in front of us at face value, we would say that we’d begin to see strong growth again in Q4 2024.”

With so much money, labor and materials being spent on home renovations, is this taking away from new construction activity? Tomalak, Emrath and Hepp all say yes to some degree. Hepp cautions that remodeling and new construction activities vary by location.

“New construction is very much concentrated in certain parts of the country such as the Southeast, whereas a lot of renovations and repairs are happening in the parts of the country that are less affordable, where people are sort of sitting in their homes,” she says

Labor is one the biggest issues facing the home construction industry. Tomalak says there are only so many skilled contractors to hire. “Contractors have a tendency of flip-flopping between remodeling and new construction based on what earns them the most money,” he says.

There are lot more remodeling projects than new homes being built, Emrath says. “The typical remodeling project does not use as much labor and materials as new construction,” he notes. “But there are some 10 to 11 million remodeling projects a year compared to 1.5 million new homes being built. Even though there’s fewer laborers, there are more projects.” ●

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Single-family housing starts in September came in at a seasonally adjusted annual rate of 963,000, up 3.7% from August’s downwardly revised pace. The bump pushed total housing starts to a seasonally adjusted annual pace of 1.36 million units, down 7.2% year over year but up 7% from August’s revised estimate.

The National Association of Home Builders (NAHB) called the jump in single-family starts “unexpected,” given the current high interest rate structure. Obstinately elevated rates have been the chief driver for the plunge in builder confidence, as the NAHB/Wells Fargo Housing Market Index (HMI) that tracks builder sentiment sank to its lowest point since January. The HMI recently dropped for a third straight month in October, falling four points to a reading of 40; index readings below 50 indicate that more builders perceive conditions as poor rather than good.

“Despite ongoing challenges in the market, the housing deficit of resale inventory continues to provide some market support for builders,” said Robert Dietz, NAHB chief economist. “Because of a lack of existing homes in the marketplace, 31% of homes available for sale in August were new construction. This compares with a historical average in the 12% to 14% range.”

Single-family permits were also up, gaining 1.8% from August. Permitting figures suggest that single-unit construction is likely to grow further, as one-unit authorizations have grown each month this year. But the numbers also reflect the toll that higher interest rates have taken on the market. For one thing, the number of single-family homes under construction during September was only 674,000, a drop of nearly 15% year over year.

As surprising as the single-family rebound was, the bulk of September’s improvement in starts was fueled by multifamily construction. Starts in this sector rose for the first time in four months, a nominally good sign, but it’s difficult to correlate to any potential trajectory moving forward given the notorious volatility in the multifamily construction space. If anything, apartment construction may be in for a near-term ebb, as multifamily permits dropped 14.3% month over month and fell to their lowest level since October 2020. This added to an ongoing downturn in authorizations that has endured for several months.

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Total housing starts fell 11.3% month over month and 14.8% year over year to a seasonally adjusted annual rate of 1.28 million units. That fell far short of the 1.44-million-unit pace predicted by economists polled by Reuters. Last month’s pace also marked the lowest level of starts recorded since June 2020.

The plunge was broad-based, with single-family starts backtracking 4.3% and multifamily starts sinking a stunning 26.3% on a monthly basis. Multifamily construction is notoriously volatile, but the headline figure is nonetheless jarring as the annualized multifamily building pace of 342,000 units was down 41.6% year over year.

The single-family slowdown to an annualized pace of 941,000 units was still up 2.4% on a yearly basis, reflecting in large part the proactivity of homebuilders that have been swift to offer discounts and other incentives to entice house hunters to buy new. Still, with mortgage rates recently on the rise and home prices continuing to grow, major headwinds loom large for residential construction.

The housing market index maintained by Wells Fargo and the National Association of Homebuilders (NAHB), which tracks builder confidence in the new single-family home market, shed five points in September to fall below the break-even level of 50 for the first time in five months. Index readings below 50 indicate that more builders view conditions as poor rather than good.

Low existing home inventory, which has recently helped to steer prospective buyers pushed out of the resale pool toward new homes, has begun to adversely affect new home sales, according to NAHB chairman Alicia Huey. The shortage of resale inventory has been a key driver of ballooning home prices, discouraging buyers while impacting new home prices as well.

“High mortgage rates above 7% combined with low resale inventory and higher home prices are slowing housing production, as many first-time homebuyers and younger households are struggling to purchase an affordable home,” Huey said. “With high mortgage rates sending buyers to the sidelines, and a nationwide shortage of 1.5 million units, we need to increase the housing supply to get this market back into balance to meet the pent-up demand for when market conditions improve.”

“Despite higher demand for new construction stemming from a lack of resale inventory, homebuilders are feeling pessimistic about the housing market because of elevated mortgage rates hovering above 7%,” said Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis. “Unfortunately, we expect mortgage rates to remain at higher levels as the Federal Reserve is likely to increase rates one more time later this quarter.”

The pullback in starts makes for an interesting contrast with the increase in permitted starts, as total permits in August were up 6.9% from July. Permitting figures will be worth keeping an eye on to gauge how builders project market conditions moving forward. A robust buyer pool seems sustainable given the richness of pent-up demand, but recent upticks in borrowing costs will be a big test of how confident builders feel about continuing to use incentives to sell new deliveries.

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The firm owns and operates a $2 billion portfolio of about 7,000 units in a wide swath of the country that includes Pittsburgh, Cincinnati, Indianapolis, Kansas City and Denver. Milhaus is also well established in the southern U.S., with properties in cities such as Charlotte, Tampa, Memphis, Dallas and Phoenix.

“We have seen strong demand … for conservatively underwritten, appropriately leveraged deals.”

Chris Beres, the company’s vice president of investor relations, spoke with Scotsman Guide this past July. He discussed the firm’s perspective on the multifamily sectors in the central and southern areas of the country, as well as prospects for real estate developments in federally designated opportunity zones.

How is the multifamily sector holding up in the secondary markets that you serve?

I think “holding up” is a pretty good term, considering all the headwinds that have impacted the real estate industry in the last 18 months or even longer, with the pandemic, rising interest rates and inflation. But multifamily demand still remains strong, particularly in the secondary markets where we are hyperfocused on building properties where there is a favorable supply-and-demand dynamic. We have seen strong demand — whether from population growth or lack of supply or both — for conservatively underwritten, appropriately leveraged deals, which are performing well in today’s higher interest rate environment.

Where are you seeing the most demand?

It is a good story across both the Midwest and the Sun Belt. Dallas has definitely been a star for us, where we delivered our first project in May — a $59 million, 279-unit property that is already 50% leased. We are seeing very strong, continued growth in the Dallas market. There is always a lot of supply in the area, but there is also plenty of demand. We also are seeing strong demand for Class A suburban properties in places such as Cincinnati, Indianapolis and Kansas City, where there are more naturally affordable price points with rents relative to local incomes. So, we are continuing to see growth in our suburban markets.

How has the lending environment changed this year?

On the debt side, we have been very fortunate. Milhaus has a great pool of diversified lenders, ranging from small local banks to regional banks, super regionals, nationals, life insurance companies and other sources. We’ve been able to get good terms. I think underwriters are very focused on sponsor quality and that helps us out quite a bit. We are still seeing attractive debt-term sheets.

On the equity side, it’s been a little bit more challenging in some cases, although we’ve been able to close deals already this year and we should be closing more in the very near future. But it takes five times the work to find partners. A year ago, you would go out to 12 sources, and you’d have four or five term sheets without too much work. Now it requires a lot more effort. There is still a lot of capital out there, but it’s mostly on the sidelines and being very selective.

One area of focus for your company is qualified opportunity zones. Explain how that works.

The opportunity zone program incentivizes investment in lower-income census tracts that were federally designated to be part of the program. The incentives are in the form of some really fantastic tax benefits. Investors with capital gains can deploy those capital gains into a qualified opportunity zone fund. This allows them to defer the payment on the capital gains until 2027. But by far the biggest benefit is that once an opportunity zone investment is held for 10 years, there are no capital gains on the investment. So, effectively, the entire investment return can be realized completely tax-free.

How many of these projects are you developing?

We’re expecting the total value to exceed $1 billion. Our projects are across seven states, ranging from Arizona to Indiana, Kansas, Missouri, Ohio, Texas and Florida. This program really has delivered in terms of bringing investment into these underserved markets. The projects will create 6,000 construction jobs; 75 full-time, on-site employees; and 3,500 units that will house about 5,000 residents. They will add more than $200 million of spending power each year to these areas. I think this program is doing a lot of good for these communities because the opportunity zones are not just bringing in residents and economic spending, they are also developing jobs in underserved areas. That makes this program especially powerful. ●

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