Fewer Cranes, Higher Rents? The Ripple Effects of Plummeting Multifamily Starts

In my January 17th newsletter, I highlighted how soaring interest rates and stubborn construction costs have throttled new multifamily development. This week, let’s unpack what this slowdown could mean for the housing market over the next few years.

The data backs up the trend: multifamily starts plunged 25% in 2024, hitting an annualized rate of just 355,000 units—a stark drop from recent years. High interest rates, courtesy of the Federal Reserve’s inflation-fighting campaign since 2022, have jacked up borrowing costs, crimping developers’ budgets. Meanwhile, construction costs, though showing signs of easing, remain bloated due to supply chain hiccups and volatile raw material prices. Add to that a shaken developer confidence—when financing tightens and the numbers don’t add up, projects get shelved.

Then there’s the supply wave. Roughly 1 million apartments were under construction in 2024—the most since 1973—fueled by cheap debt in 2021-2022 and migration-driven demand from high-cost states. Sun Belt markets like Austin and Phoenix saw a flood of new units, but this oversupply is now cooling demand for fresh starts. Occupancy rates are softening, and rent growth is stalling in these areas.

What’s Ahead: A Tale of Two Phases

In the near term, some markets are experiencing declining rents. With a glut of units hitting the market from projects launched years ago, vacancy rates could climb to 6.2% by 2025, per some forecasts. National rent growth is projected to hover between 1.5% and 2.2%, with oversupplied markets like Nashville or Phoenix potentially seeing rents flatten—or even dip. This might change though. New starts have cratered—down 50% from 2021-2022 peaks—and the pipeline is drying up fast. By 2026-2027, completions could slump to as few as 327,000 units, tightening supply once more.

Zoom out, and the picture shifts. Decades of underbuilding have left a national housing shortage that isn’t disappearing. A sustained drop in multifamily construction could amplify this gap, pushing rents higher as demand outstrips supply. Simple math: fewer new apartments in a growing market equals upward pressure on existing rents.

Developers at a Crossroads

For many builders, this lull is a chance to regroup. Some projects wrapping up now are worth less than their construction costs—a tough pill to swallow. Yet a few bold players are pressing forward, betting on a different landscape in two years. Launch a project in 2025, and you might deliver the only new building in your submarket by 2027.

The Inflation Wildcard

Here’s the kicker: taming inflation is the quickest path to reviving the development pipeline. Job growth, economic gains, and rent demand all matter, but nothing sways development feasibility like inflation—and the Fed’s response to it. Take 2024 as a lesson: a roaring stock market didn’t lift real estate values. Each equity surge stoked inflation fears, nudging Treasury yields and interest rates higher. Back-of-the-envelope math? A 1% rate hike could demand 10% higher rents to keep returns steady—a leap today’s market won’t support. Real estate needs a return to the days when stocks can rally without Treasuries tagging along, which only happens when inflation’s tamed for good.

The slowdown’s effects will unfold in stages—relief for renters now, potential strain later. For investors and developers, it’s a moment to watch closely and plan smartly.

-Ben Michel

Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in multifamily real estate. Register Here to be notified of available investment opportunities.