Builders bet on multifamily housing — but only in certain places

Buying a house is tough right now, with interest rates stuck above 6.5%, and home prices at all-time highs. So home builders are betting on rental housing.

Permits for construction of multifamily properties picked up 9% in July compared to the month prior, according to new census data. But construction permits are aspirational — they’re bets placed with the near-term future in mind.

“I see builders looking at the underlying housing fundamentals and betting that renter demand will continue strongly over the next couple of years,” said George Ratiu at the National Apartment Association.

He said that’s because a lot of people can’t afford to buy, so they have to rent. And with the single-family housing market unlikely to thaw anytime soon, apartment builders are seeing opportunity.

“From early signals, we are seeing investor interest beginning to show up, right? Several funds are are beginning to start fundraising,” Ratiu said.

A big caveat: Builders are getting pickier about where they build multifamily construction, said industry consultant Jay Parsons. “You're seeing more focus on deals that have some type of subsidies or tax incentives, tax abatements that help the deals pencil out,” he said.

Those deals need to “pencil out” because construction has gotten a lot more expensive. There’s an ongoing, persistent skilled-labor shortage, said Robert Dietz, chief economist at the National Association of Home Builders. Plus, costs are higher.

“We continue to face challenges with building materials, and that includes the lagging effects of tariffs,” Dietz said.

Higher prices for materials like copper and aluminum mean not all of those permits pulled in July will actually turn into completed multifamily housing units.

“Our overall sentiment reading of multifamily builders is slightly negative right now,” Dietz said.

Sentiment is better in some parts of the country versus others. Builders are more optimistic in areas where rents are going up the most right now, said Redfin Chief Economist Daryl Fairweather.

“Milwaukee is one. As Chicago has gotten so expensive, Chicagoans have moved up to Milwaukee, and that has put pressure on rents there. Cincinnati is another. Pittsburgh is one that comes up, Baltimore,” she said.

Conversely, in cities like Denver, Charlotte, and Dallas, renters are more likely to get discounts. That’s because there’s a lot of supply due to a flurry of apartment building in those markets early on in the pandemic.

Fairweather said she expects builders to avoid those cities for the time being.