Multifamily Construction at a Snail's Pace

As the U.S. Federal Reserve attempts to fight persistent rent price inflation, housing supply is one of the hottest topics in American economic discourse. The United States has a shortage of multifamily housing units in many major metropolitan areas, and as a result rents have generally outpaced inflation across the country. To quickly address high rents, developers in the United States must quickly add apartment housing supply - but the trend in multifamily construction timelines suggests that will not happen.

From the 1970s to the early 2000s, the number of housing units started, under construction, and completed consistently tracked for buildings with 5+ units. This makes sense - construction timelines were relatively short and stable, meaning that the start of a housing development would consistently lead to the completion of the same housing development, typically within the span of a single year. 

Beginning in the early 2000s, however, something changed: the number of housing units under construction began to outpace both starts and completions for 5+ unit buildings, indicating a slowdown in construction timelines and a growing backlog of large multifamily housing projects in construction. In 2023, this national backlog reached historic levels; there were over twice as many housing units under construction as there were completions for buildings with 5+ units on a per household basis:

The divergence in housing construction from housing starts and completions for multifamily projects is caused by growth in multifamily construction timelines, which have nearly doubled since the early 2000s. In 2000, an average multifamily development would take 9.8 months to go from construction start to construction completion. In 2022 however, an average multifamily development took 17.0 months to go from start to completion - a 7.2 month (+73%) increase. The strength of this multifamily trend did not hold for single-family home developers, whose average construction timelines rose just 1.4 months (+23%) over the same span:

The drop in multifamily production relative to multifamily starts is troubling for the U.S. Federal Reserve because standard monetary tools can only have, at best, modest immediate impacts on the root causes of slower multifamily construction. A handful of factors have likely contributed to the dramatic slowdown of construction, and any corresponding multifamily supply shortages, throughout the United States since the early 2000s:

1. Increased Regulation and Permitting: Over time the complexity of building codes, environmental regulations, and local zoning laws has increased. These changes often generate more comprehensive planning and approval processes before and during construction, leading to delays.

2. Labor Shortages: The construction industry has experienced periodic labor shortages, particularly skilled labor shortages, which have become more pronounced since the early 2000s and lead to less productive construction. Economic cycles, such as the Great Recession in 2008, exacerbated these shortages.

3. Material Supply Chain Issues: Supply chain disruptions, including delays in the delivery of key building materials, can play a significant role in extending construction timelines. The early 2000s saw an increase in global demand for construction materials, which strained global supply chains and affected U.S. construction projects, as did the years following the 2020 global pandemic.

4. Economic Factors: Macroeconomic factors, including fluctuations in interest rates and the availability of development financing, can influence construction timelines. The early 2000s, following the dot-com bubble burst and leading up to the housing boom, saw significant shifts in economic conditions that impacted construction financing and feasibility, pausing some in-construction developments.

5. Urban Density and Site Constraints: Undeveloped or underdeveloped land in major metropolitan areas is increasingly scarce, meaning new apartments are now built in denser areas than in the past. This leads to more logistical constraints: limited site access, noise restrictions, and coordination with city infrastructure can further delay construction.

6. Design Complexity and Amenities: Modern multifamily units are often more complex in design and include a wider range of amenities compared to those built 30 years ago. These features can require more sophisticated construction techniques and a may cause a higher share of multifamily construction capital and labor to be used on unrentable amenities rather than units. The dramatic rise of gyms in new multifamily apartments since the 1970s suggests that developments are competing more on amenities now than in the past; the rise of amenities like gyms, office spaces, and common areas may contribute to increased project timelines:

Overall, the consistent increase in multifamily construction timelines bodes poorly for U.S. housing. The existing backlog of units under construction, as well as the diverse causes of the slowdown, suggest that for the foreseeable future planners and developers across the U.S. will have a weakened ability to respond to shifting demographic or geographic trends. Additionally, in regions that see sustained growth in multifamily housing demand, it is less likely that developers will quickly respond to increased demand with added supply, exasperating regional rent growth for renters.