Dive Brief:

• The apartment industry is on alert for how rising interest rates will affect new projects, and recent construction numbers from the Census Bureau help to paint the picture. 
• Multifamily starts dropped 27% from April to May and 3.3% year over year, according to the Census Bureau. However, they jumped 20% year to date. Permits also declined from April to May, falling 10%. Despite that drop, they increased 20% year over year and 13% year to date.
• Contractors across the country are warily watching interest rates. Marc Padgett, president of Jacksonville, Florida-based Summit Contracting Group, the third largest apartment builder in the country, doesn’t see interest rates killing or postponing deals in the Southeast yet, but believes it could be coming soon. “The market is saturated with the five-over-two podium and similar [types of] downtown urban products, which are significantly higher in cost to build,” he said. “That cost combined with higher interest rates is certainly a deal killer in many cases.”

Dive Insight: 

In a sign that interest rate increases may be beginning to wreak havoc on the apartment development market, the number of authorized apartment units that have not started jumped to 30% year-over-year in May.

“While a rising backlog frequently indicates a likely rise in near-term starts, the rapid rise in both financing costs and construction costs could cause some developers to hold off on starting projects,” said Ken Simonson, chief economist at Associated General Contractors of America, a trade group based in Arlington, Virginia.

Still, Simonson says he has not heard from any multifamily construction contractors saying that developers have put projects on hold or canceled them. That could change later in the year, however.

“Developers and investors are also vulnerable to higher construction and financing costs, so I do expect demand for new apartment construction to cool later this year,” Simonson told Multifamily Dive. “The turnabout is likely to be abrupt and steep, but I can't see around corners and don't know when it will hit.”

Already developers are grappling with higher costs for materials and labor, though a slowdown could cool demand for those things. Additionally, regulations at all levels of government account for an average of 40.6% of apartment development costs, according to research from the National Association of Home Builders (NAHB) and the National Multifamily Housing Council (NMHC).

Nevertheless, increasing interest rates could bolster the apartment market — by stimulating more rental demand.

“For the moment, I expect the runup in mortgage rates and house prices to add slightly to demand for rental apartments, as would-be homebuyers find they can no longer afford a house or the monthly payments but still want to move to a larger, newer or better-located space,” Simonson told Multifamily Dive.

Interest rates may also start hurting the production of these other housing types, which would push people toward rentals. Overall residential starts also fell — dropping 14% from April to May and 3.5% year over year. However, they increased 8.2% year to date. 

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