Multifamily Permits & Starts Rebound
Premier office towers, which have so far avoided the fate of the wider office sector, are finally struggling.
Multifamily Permits, Starts See Mixed Performance in 2023
The good news is that both permitting and construction starts improved by EOY 2023. The bad news is that both metrics were trending down for most of the year.
By the numbers: In December, the seasonally adjusted annual rate (SAAR) for multifamily permits rose 1.4% from November to 449K units. But when compared to 2022, December's numbers were 26.6% lower. Starts, on the other hand, were up 7.5% MoM, reaching 417K units. But similar to permits, starts were down 9.5% YoY.
Digging deeper: On the flip side, completions were up 11.1% MoM, with 509K units completed, and up 33.6% YoY. The number of multifamily units under construction remained unchanged from November at 991K units, but was up 7.4% YoY. Additionally, the number of multifamily units authorized but not started fell 11% in December to 121K units.
City by city: Among the top 10 markets for multifamily permitting, Austin surpassed NYC to take the top spot, with nearly 21.4K units permitted in 2023. Phoenix slipped to third, permitting 18.9K units. Dallas remained in fourth with 17.3K units permitted, followed by Houston in fifth. Atlanta, LA, Raleigh/Durham, DC, and Denver were also in the top 10.
Region by region: When comparing multifamily permitting trends to the previous year, all four Census regions recorded declines. The West and Northeast saw the biggest drops, down 43.9% and 29.9%. The South and Midwest regions had more moderate declines of 19.8% and 15.3%. Despite the overall slowdown in multifamily permitting nationally, some markets still showed YoY gains.
➥ THE TAKEAWAY
Glimpse of hope: The end of 2023 showed a positive uptick in multifamily permitting and construction starts, offering a beacon of recovery after a year of steep declines. However, the significant YoY drops, especially in key regions, indicate a cautious path forward for multifamily investors, owners, and operators in 2024.
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Economic Downturn Finally Hits Premier US Office Buildings
The Winthrop Center project in Boston. PHOTO: MILLENNIUM PARTNERS
Elite office buildings across the country started seeing the effects of the real estate downturn. Rents at premium properties are falling, while the rate of leasing has slowed down. Tenants, facing higher interest rates and economic pressures, are also more cost-sensitive.
Record lows: Few office developers are considering new ground breakings. Low rents simply do not justify the cost of building expensive office spaces. Last year, the U.S. saw the lowest level of office starts since 2010, with only 31MSF. According to CoStar, new buildings could represent just 1% of total inventory by 2027, the lowest in at least 25 years.
Not so hot right now: Premium office spaces with high-end amenities have performed well since the pandemic. But their sterling appeal is finally declining. Asking rents for prime space in 16 major markets fell in Q3 after peaking in Q2. CBRE reported average asking rents under $69 PSF in Q4. The share of leasing activity in premier towers also fell, with new leases 43% smaller than in 2019.
Cost-effective options: Companies are more cost-conscious than ever when it comes to office space. The gap between asking rents in top buildings and lower-quality buildings is also widening, leading to more lease renewals. In 2022, renewals accounted for 42% of leasing volume, compared to 31% from 2020–2021. The shift towards remote and hybrid work means lower-grade spaces might be a better option.
➥ THE TAKEAWAY
Changing landscape: Office market dynamics are shifting as companies embrace remote and hybrid work, leading to a decline in demand and leasing activity for premium office towers. With fewer ground breakings and a preference for more cost-effective options, the future demand for even premium office space remains uncertain.
The multifamily housing market in 2023 faced a 40%+ drop in starts, according to RealPage.
This downturn reflects the impact of higher debt costs, falling property values, steep construction costs, and reduced rents and occupancy. The overall outlook for 2024 is pessimistic, with most developers expecting further reductions in starts.
Despite a projected spike in completions this year, a significant drop-off is anticipated by late 2025, which will impact both investors and policymakers.
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