Commercial real estate is facing stress from several directions. The primary stress is rising interest rates, which are putting upward pressure on cap rates (which pushes down asset values), making refinancing costs increasingly difficult and expensive to come by. But there is another risk arising, specifically to the multifamily niche of commercial real estate: oversupply. Recent data suggests that there may be a short-term glut of multifamily units hitting the market at an inopportune time.
To fully explain this issue, let’s take a look back at construction trends for multifamily properties (defined as properties with five or more units) over the last several decades. As you can see in the graph below, after severe declines in the number of multifamily units from 2008-2014, multifamily construction and the total number of multifamily units have picked up considerably.
Since the beginning of the pandemic, the upward trend of increased multifamily building exploded even further, and as of Q4 2022, surpassed one million units under construction for the first time (at least according to CoStar’s data).
Of course, it takes several months, if not years, to build multifamily units, even in good times. But recent years have not been easy on builders—at least in terms of delivery schedules. With supply chain issues and labor constraints, construction has taken longer. This trend is resulting in a huge glut of inventory that has yet to hit the market. Looking at the chart below, you can see CoStar’s forecast for delivered units shows 2023 being the highest on records, with 2024 coming down a bit but still high. Yes, forecasting is difficult, but forecasting construction deliveries is a bit easier than other datasets. Due to the fact that builders and developers need to get permits for construction, there is solid data about projects that are planned and in the…