By Joe Gose
Borrowing and construction costs pressure investment returns, but rental increases still make new projects possible.
Rapidly rising interest rates are the latest difficulty to hit multifamily developers who already were challenged by supply chain and labor shortages, rising construction and land costs, and construction delays.
In most other business cycles, the stress placed on investment returns would have had a severely negative impact on development. But double-digit rent growth in many markets continues to fuel new projects, especially as accelerating home prices over the past several months give renters little choice but to stay in their apartments.
“Many developers are enjoying what may be the strongest rent increases at the front-end of their holding period, so that’s certainly going to kick up returns from a present-value perspective,” said Dave Borsos, vice president of capital markets at the National Multifamily Housing Council. “So people may still think that they can get relatively strong rent increases that are above historic underwriting levels, which is making deals work.”
In September, U.S. rents grew 9.4 percent on a year-over year basis, according to Yardi Matrix. That was actually the first time annual increases dipped below 10 percent in more than a year.
Observers acknowledge that renters won’t be able to bear such extraordinary rent growth forever, said Jon Paul Bacariza, vice president and the Tampa, Fla., market leader for Ryan Cos., which typically acts as a merchant builder. That’s particularly true as wages have failed to keep up with inflation.
Tapering rent growth is likely to thwart the plans of developers who are counting on escalating rents to offset higher construction and debt costs when it comes time to sell or find permanent financing. In late September, the Secured Overnight Financing Rate,a short-term interest rate benchmark for construction loan pricing, jumped roughly 70 basis points to nearly 3 percent. In March, it was .05 percent.
About Real Estate Intelligent Marketing (REIM):
REI Marketing is an innovative Real Estate Marketing Company that offers distinctive real estate services to developers and multifamily investors. We are a vibrant, dedicated team of industry professionals with international experience in marketing and multifamily investment.