Multifamily Developer Confidence Weak in Third Quarter Amid Financing Concerns

The National Association of Home Builders (NAHB) Multifamily Market Survey (MMS) revealed a decline in confidence among multifamily developers in the third quarter of 2023.

The Multifamily Production Index (MPI), which measures builder and developer sentiment about current production conditions in the apartment and condo market, fell to 38, well below the break-even point of 50.

This indicates that more respondents perceive market conditions to be poor than good.

The MPI’s components reflect varying sentiment across different market segments. Sentiment about production of mid/high-rise apartments was considerably weaker than that of garden/low-rise, subsidized, and built-for-sale units.

The component measuring garden/low-rise units had a reading of 45, while mid/high-rise units scored 28, subsidized units 39, and built-for-sale units 32.

Despite the redesigned MPI’s limitations for quarter-to-quarter comparisons, a separate survey question revealed a noticeable deterioration in the multifamily market since the second quarter.

A significant 33% of multifamily developers reported worsening overall market conditions, compared to only 5% who perceived an improvement.

The Multifamily Occupancy Index (MOI), which gauges the industry’s perception of occupancies in existing apartments, also showed signs of weakness.

The MOI, which fell to 82, indicates that while more respondents view occupancy as good than poor, the overall sentiment is not as positive as in previous quarters. Similar to the MPI, the MOI’s components reflect varying sentiment across market segments.

Occupancy sentiment for mid/high-rise apartments lagged behind garden/low-rise and subsidized units, with readings of 74, 84, and 89, respectively.

“High operating costs are posing challenges for existing properties, particularly affordable ones, and the rising cost and reduced availability of credit are hindering the financing of new projects,” noted Lance Swank, president and CEO of Sterling Group, Inc. in Mishawaka, Ind., and chairman of NAHB’s Multifamily Council.

“It’s also worth noting that the garden/low-rise market is outperforming the mid/high-rise market in terms of both construction and occupancy rates.”

NAHB’s tracking of apartment construction patterns supports Swank’s observation, indicating a shift towards lower-density markets that favor garden/low-rise buildings.

NAHB’s Home Building Geography Index reveals that over the past three and a half years, the share of apartments built in core counties of large metros has dropped from 41.7% to 37.4%, while the share built in small metros, exurbs, and rural markets has risen from 31.3% to 35.6%.

“The relatively weak MPI aligns with the declining production levels observed in the second half of 2023 and NAHB’s projection of further declines in 2024,” stated NAHB Chief Economist Robert Dietz.

“Both NAHB and Fed surveys indicate that the cost and availability of credit for builders and developers have become significant impediments to new construction.”

The decline in multifamily developer confidence underscores the impact of rising operating costs, financing constraints, and a shift in construction preferences.

These factors are likely to influence the trajectory of multifamily housing development in the near future.