The latest monthly data from the U.S. Census Bureau shows decelerating levels of construction starts and permits.
The data covers multifamily development projects with at least five units (including for-sale product, although the vast majority is rental).
Data through March reflects pre-COVID-19 conditions, while April reflects both pre-COVID (preparation for starts and permits) and COVID-19 (final decision). The deteriorating state of the market has led to some project cancellations and postponements. The changed project work environment and health concerns of COVID-19, along with construction moratoriums in some markets, are slowing the pace of construction and keeping projects in the development pipeline longer, so the under-construction total is being sustained at a high level.
Construction Starts Declining from Strong January
In 2019, construction began on 388,900 units, up 7.9% from 2018. In Q1 2020, starts totaled 113,300 units, a 51.7% gain from the prior year. April 2020 saw a particularly steep year-over-year decline (-35.4%), a clear sign of cancelled or delayed projects due to COVID-19. CBRE Research expects May to more fully reflect a pull back. Starts will not fall off as much as in prior recessions, however. Developers and their capital partners see relatively blue skies two to three years out when their developments will begin lease up.
April Permits Fall 25% Year-over-Year
Permitting activity also provides an indication of slowing development momentum. In 2019, 481,400 multifamily units received permit approval, 11% ahead of 2018. Year-to-date April 2020, 129,000 units were approved, 6.1% below the prior year. In April, only 30,300 units were permitted down 25% from the prior year.
Under Construction Pipeline Rises 15% Y-o-Y
In April, 669,000 multifamily units were under construction, up 14.8% year-over-year. The total represents deliveries over the next two to three years. The under-construction total first reached 600,000 in Q3 2016 and stayed close to that level through early 2019. Over the past year, the count has been rising due to both increased projected starts and the extended time needed to complete projects. Going forward, the number of starts is expected to subside, but project delays, particularly related to COVID-19, will keep the under-construction total at high levels.
Recent Starts Totals Below Prior Cycle Peaks
For the past few years, U.S. multifamily starts have reached high levels for this cycle. However, the recent and current totals pale in comparison to the phenomenal development phases of the late 1960s/early 1970s, late 1970s and mid 1980s.
In those periods, starts were well above the current levels. The peak year was 1972 with 906,200 multifamily starts.
More than Half of Metros Had Lower Permits in April
The April permit data for major metros also reflected slowing in construction activity; for the 28 metros with at least 1,000 units permitted year-to-date through April, a total of 19,539 units received permit approval down 16.2% from March. Units permitted in April fell in 16 of the 28 markets.
One month of permit data does not necessarily constitute a trend, and metro multifamily permit data is "lumpy." Nevertheless, the data does indicate a reduction in permits for more than half of the markets. Further decline is expected for May.