High Interest Rates & Construction Costs Impact Multi-Family Development

Industry News,

Originally Published by: NAHB — May 10, 2024
SBCA appreciates your input; please email us if you have any comments or corrections to this article.

Every quarter, the National Association of Home Builders (NAHB) conducts a survey of multifamily builders/developers and property managers.  The first part of the survey collects the information required to produce the Multifamily Market Survey (MMS). The MMS produces two separate indices: 1) the Multifamily Production Index (MPI) and 2) the Multifamily Occupancy Index (MOI).  The MPI is a weighted average of current conditions in three markets: low-rent and market rate rental units-apartments along with for-sale units (e.g., condominiums).  The MOI is a weighted average of current occupancy indexes for class A, B, and C multifamily units.  Results for Q1 2024 were released yesterday which can be accessed here.

In addition to the questions required for the MMS and its components, the quarterly survey sometimes includes a set of “special” questions on a topic of current interest to the multifamily industry.  The special question included in the Q1 2024 survey asked multifamily builders and property managers about how serious impediments are to starting a new multifamily development today. This was completed using a scale from1 to 5, with 1 being no impediment at all and 5 being a very serious impediment.

As shown in Figure 1, high interest rates and high construction costs are the top impediments to starting new multifamily development , with both options receiving an average rating above 4 and at least 80% of respondents rating each option as a 4 or 5.  The next four options (high land costs, regulations, rising operations costs, lack of lender interest) are moderate impediments, with at least 50% of respondents rating each option as a 4 or 5. 

The least likely impediment to additional multifamily construction is a rising/high vacancy rate, which received the lowest average rating of 2.5, corroborating the high MOI reading from the most recent MMS.