Struggling To Find Equity, Developers Pull Back On New Builds

Multifamily developers need equity to build new properties, but that’s getting harder to come by.

Construction starts in the national multifamily market plummeted to a 15-year low in the first quarter, and developers are expected to continue to scale back their growth plans through 2026. While there are plenty of lenders who will grant loans, investors are becoming less willing to put their cash on the line for a down payment.

In this environment, the tricky part for developers isn’t obtaining debt but finding investors willing to allocate equity to fund new projects, Geri Borger Urgo, president of NewPoint Real Estate Capital, told Bisnow. 

“I've not seen a lot of equity moving towards new construction,” she said.

NewPoint, which agreed in March to be acquired by Franklin BSP Realty Trust, is one of the nation’s 10 largest mortgage banking firms by volume and one of only 19 firms approved by Fannie Mae and Freddie Mac to arrange government-sponsored lending.

Developers broke ground on 55,000 apartment units in the U.S. in the first quarter — the lowest quarterly volume since 2011 — beset by higher costs and a slowdown in rent growth, according to Apartments.com and CoStar. A total of 579,000 units were underway in the first quarter, half the volume from the peak of 2023.

Investors are seeing a disconnect between the kind of returns they’re seeking and what new development can promise at today’s costs, according to Urgo. Increasing construction costs, higher-for-longer interest rates and a spike in oil prices make it hard to achieve income necessary to pencil out ground-up projects, she said. 

Elevated land prices and a drop in apartment values are also deterring new builds, investors say.

“You just reached a point in time, which is unique, where you can buy newly built, stabilized product for less than what you can build up the street,” said John Gray, chief investment officer for multifamily investor Waterton. “We are at the point of the cycle today in most markets where asset values are cheaper than construction.”

Ben Kriegsman, vice president of investment firm Lion Real Estate Group, said pushing dollars into value-add apartments offers more attractive returns than new development. Kriegsman leads fundraising and capital outlays for the firm. 

For example, the firm’s Stone Creek at Old Farm apartment community in Houston, which it bought at the trough of the area’s apartment cycle, is “delivering a consistent, double-digit cash-on-cash yield,” he said. The firm bought the property with a $16M loan, according to Harris County property records.

For value-add investors, the lack of new development is a gold mine and will contribute to future rent growth, Kriegsman said.

“The harder it is to build, the less supply we compete with in the market,” Kriegsman said. “The less supply we compete with, the more opportunity there is for rent growth in existing assets.”

That could be bad news for the millions of households seeking more, and cheaper, housing options in the U.S., whether on the rental or for-sale side. More housing means lower prices.

The housing shortage in the U.S. hit an all-time high last year with a deficit of 4.7 million units, according to a Zillow analysis of data from the U.S. Census Bureau. That shortage has led to 8.1 million households sharing units with families and people unrelated to them.

The multifamily rental market is poised to recover this year from a sustained slump as supply and demand become more favorable, according to a report from Cushman & Wakefield. But builders are expected to only deliver 392,000 units this year and even fewer in 2027, 367,000 units, according to the National Association of Home Builders. Multifamily starts peaked in 2022 at 547,000 units, according to NAHB.

Meanwhile, construction costs are expected to rise 4% this year to $1.26T, the Urban Land Institute reported, citing data from Dodge Construction. That will only complicate the kind of returns equity can expect on a new-build apartment deal, Urgo said.

Gray said apartment developers are finding pockets of opportunity to build new multifamily. But those are often in places overlooked by the influx of the post-pandemic supply — mostly suburban apartment complexes with surface parking lots instead of expensive parking decks. And generally, they focus on sites already entitled by municipalities to help keep down costs, Gray said. 

But as developers continue to pull back on new projects, Urgo said apartment landlords will have time to fill empty units and eventually push rates up again.

“I’m certainly hopeful that you get more new construction in the coming years,” she said.