Single-family and multifamily construction slows as interest rate climbs

Residential developers are beginning to feel the weight of rising interest rates, as evidenced by the latest construction data from the Census.

Total residential housing starts—the number of residential units that began construction over the year ending in May 2022—fell by 14.4%. Single-family starts were down by 9.2% and multifamily starts fell by 26.8%. Multifamily starts are naturally volatile: the number of starts in this segment was up by 25.4% last month.

U.S. residential development is now entering a more cautious phase due to rising mortgage rates, which are pushing some would-be buyers to the sidelines. The 30-year fixed rate mortgage average hit 5.23% during the week of June 10 and has since moved higher to 5.78%, a level not seen since 2008.

The net impact of these recent trends will likely benefit multifamily real estate as housing affordability challenges continue to push people towards renting. We also do not expect to see a significant or sustained slowdown in new housing construction for either single-family or multifamily, considering the massive deficit of housing in the U.S.

There are currently 857,422 multifamily units under construction across the country as of mid-June 2022, according to CoStar. From CONTI Capital’s perspective, this is precisely where we see immense opportunity in the months ahead. Developers will be selling newly completed assets in a more challenging macroeconomic and financial environment, compared to only a few months ago. CONTI’s ability to leverage our strong relationships gives us great confidence in our ability to continue to execute our strategy in the months ahead.

We are closely following the financial landscape in the current market, particularly considering the Federal Reserve’s aggressive interest rate hikes. Some pockets of the U.S. residential market will certainly feel the pressure of rising mortgage rates and a general moderation in economic activity. However, the simple fact is that the U.S. remains under-housed and there is no imminent shift in the macroeconomic environment that will change this reality.