Multifamily Construction Cooldown Has Developers Entering New Sectors

Multifamily was a pandemic-era golden child. 

Historically low interest rates and federal government stimulus, combined with people wanting new spaces better suited for new stay-at-home lifestyles, made the asset class a no-brainer during the early years of the pandemic.

But the apartment market has been slipping this year. Due to the Federal Reserve’s interest rate hikes, the rising cost of construction and labor, and softening rents, capital sources like banks, private equity and debt funds are holding tight to their wallets, bringing new multifamily construction to a virtual standstill.

The third quarter was the D.C. area’s slowest for new multifamily construction starts since 2010, with only 891 units across the region breaking ground. 

With traditional market-rate multifamily feeling a slowdown, panelists at the Bisnow Multifamily Annual Conference in D.C. last week said they are pivoting to more niche areas under the residential umbrella — sectors like affordable housing, senior living, student housing and build-to-rent. These assets have individual advantages that can brace them against the tides of the market, panelists said. 

“Everybody knows that our normal market-rate deals aren’t quite penciling right now,” Jair Lynch Real Estate Partners Vice President Ruth Hoang said. 

Jair Lynch, which has built a host of apartment and mixed-use buildings in D.C. over the last two decades, is using this downtime in the multifamily construction market to diversify, she said.

“We’ve really pivoted and focused on affordable housing,” Hoang said, “We have about 6,000 units of attainable housing across the DMV and Atlanta. So we’re really shifting and focusing our attention there.” 

Newly on the boards for the firm is an apartment community next to the Shops at Penn Branch in Southeast, where 90% of the 189 units will be attainable for 99 years, with the support of a $22M loan from Amazon’s housing fund announced in September. The firm recently completed a lease-up for a 129-unit all-affordable senior development, Entwine, in Takoma.

Affordable housing is a sector where government incentives, including federal Low-Income Housing Tax Credits and D.C.-specific subsidies, could help push deals into penciling territory. D.C. has become a national leader in subsidizing affordable housing development with its Housing Production Trust Fund, which has allocated $100M or more in each of the last several years. 

“There are tremendous incentives for those who are inclined to do affordable developments in this area,” AYA Enterprises founder and principal Myron Adoteye said. 

He said that although there could still be more incentives, the District is “first among equals when it comes to putting money where its mouth is when it comes to encouraging affordable housing.”

Lument Senior Managing Director Paul Weissman echoed the sentiment.

“This area, because housing costs have been higher for longer, has allocated a lot more resources to funding affordable housing to make those transactions work,” he said. “So those resources are very robust.”

Davis Construction Executive Vice President David Kuncheff, whose general contracting firm depends on construction activity for business, said it has focused more on affordable projects. 

“What’s hot for us and will probably get us through ’24 is affordable housing is a big market right now,” Kuncheff said. “You know, the money is out there — government money out there for affordable housing.” 

Penzance Chief Operating Officer Brian Finerty said affordable housing has been coming up in Penzance’s conversations. He said the firm, which has traditionally built high-rise, market-rate apartments and invested in office assets, would be interested in pivoting to the affordable space, but the question the firm struggles with is how it would execute that with no experience. 

“A lot of organizations that try to expand from a traditional multifamily platform of doing mid-rise, high-rise fail when they try to get into affordable,” Finerty said. “Because I think it’s a completely different mindset for an organization to do that well, and usually the people in the organization aren’t set up.

“It’s really not about returns. It’s about fees, construction and development, and doing it again and doing it again,” he added. 

As for other types of pivots, Principal Real Estate Investors Managing Director Jim Halliwell said his firm is shifting to real estate sectors that aren't as directly correlated with the country's gross domestic product — areas like senior housing, student housing and medical. 

“Healthcare spending has not been negative in 25 years. It’s averaging increases of about 5% per year,” he said. “Medical office, a wonderful investment and has really very little correlation to GDP. Student housing, actually negative correlation — student housing tends to do better when GDP goes down.

“GDP isn’t going to affect the aging. What sectors do well in aging? Fifty-five-plus, manufactured housing communities do well, senior does well, age-restricted does well.”

Instead of ground-up construction, FGM Architects principal Ryn Burns pointed to some developments his firm is working on that add to assets — projects like building affordable housing on top of fire stations. Several fire station redevelopments have moved forward in D.C. in recent years as the District looks to add housing to city-owned properties.

NewPoint Real Estate Capital Head of Production Geri Borger Urgo said her firm has stepped into the build-to-rent space, launching a new financing program in October.

“Build-to-rent seems to be a popular option, specifically in the Southeast, not necessarily in the mid-Atlantic, but a little bit,” she said. “But how can we facilitate that into the seemingly illiquid market?”

Many developers said they are being more judicious in starting market-rate multifamily projects and that they have put projects on pause.

“There are some pieces of land where we’ve put pencils down,” Brookfield Multifamily Executive Vice President Rebecca Snyder said, adding that the developer is “being very measured and only starting construction where it makes sense.” 

But with the expectation that the capital markets could open back up soon, developers said firms also need to be ready to jump. 

“The strategy is to move things along as far as they can go so that they’re ready to go when that time comes,” The Menkiti Group CEO Bo Menkiti said.

CORRECTION, DEC. 8, 4:15 P.M. ET: A previous version of this story incorrectly described Jair Lynch’s projects in Southeast and Takoma.