Apartment construction is booming, but it probably won’t last

New numbers out from the Census Bureau this week on construction spending in the month of April. Overall, builders spent a bit more than they did the month before — and about 7% more than a year ago. 

Dig down a bit deeper in the report and you’ll see that spending on the construction of multifamily homes — apartment buildings and the like — was up a whopping 25% year-over-year. That’s a much rosier picture than spending on single-family homes, which went the opposite direction.

But with high-interest rates and construction costs, the party’s not going to last forever. 

Multifamily housing projects are driving business these days for Brian Murphy, president of the carpentry firm BAM Contracting in St. Louis.

“We have a large backlog, certainly through the end of the year,” he said.

Murphy said he’s seen huge demand for apartment complexes in his main markets of St. Louis and Kansas City over the past decade — though things are shifting slightly. 

“I think we’re seeing a little bit of leveling off, but it’s leveling off at a high rate, you know what I’m saying?” he said.

The construction business is still good, as it often takes two years or more to develop an apartment building. So a lot of the boom in apartment construction we’re seeing now was financed before the Federal Reserve began hiking interest rates. 

Now, with higher rates and tighter credit conditions, the outlook for new projects is a lot cloudier for developers like Nathan Dagesse with EIV Technical Services in Vermont.

“I would say that market-rate, multifamily housing is going to really struggle to get off the ground moving forward,” he said.

Yet it’s those same high-interest rates that are resulting in high mortgage rates and making single-family homes less affordable, pointed out Aaron Jodka, director of research for U.S. Capital Markets at Colliers.

“The high cost of housing is also keeping a lot of folks in the rental market or pushing them to the rental market,” he said.

Plus, Jodka added, there are just a lot of people in the prime rental demographic right now. “You’ve got some millennials in there, you’ve got some Gen Z in there.”

Their demand for new rental units isn’t going away, he added, even though there may be fewer apartment buildings to meet their needs.