Multifamily construction hits rock bottom: What’s next in 2025?

The multifamily housing market faces slowdowns, but stakeholders can adapt through emerging investment opportunities.

December 02, 2024

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Key takeaways

  • Historic Supply Shortage: Construction starts have hit their lowest point since 2013, with a 218,500-unit gap between completions and starts, signaling significant supply constraints by 2026.
  • Market Opportunity: While current rents remain soft, supply-constrained markets offer strong future growth potential. Value-add properties and strategic acquisitions promise attractive returns for patient investors.
  • Financing Limitations: Regulatory pressures and rising borrowing costs are restricting traditional lending, pushing developers toward alternative funding sources and innovative construction methods.
  • Housing Alternatives Emerge: Single-family rentals are gaining popularity in suburban markets, while coliving spaces address urban affordability challenges. Both are transitioning from niche to mainstream solutions.
  • Innovation Adapts: Modular construction, green building practices, and construction technology enable developers to reduce costs and streamline timelines in a tough market environment.
  • 2026 Outlook: Despite current challenges, the growing supply-demand gap creates significant opportunities for those who can navigate near-term headwinds and strategically position themselves for recovery.

Market forces creating opportunity

The widening divide between completed units and new construction starts to tell a compelling story. While today’s market sees a steady stream of apartments from previous years’ projects, new development has slowed dramatically amid soaring costs, tight lending, and economic headwinds.

This supply crunch could spell an opportunity for patient investors. Despite current challenges—including softer rents and negative leverage—the looming supply shortage suggests stronger rent growth ahead. Forward-looking investors who can weather near-term market softness may find themselves well-positioned as supply tightens.

Banking constraints slow the development of the pipeline

Regulatory clampdowns on commercial real estate lending have made banks increasingly hesitant to fund new construction. With both major and regional lenders stepping back from the market, developers face a tough road ahead. While market fundamentals may improve, stricter lending standards and elevated borrowing costs mean only the most financially sound projects are likely to move forward. This higher threshold for development financing suggests the construction slowdown could persist even as market conditions recover.

Construction slowdown ripples through the supply chain

The steep drop in new apartment projects is sending shockwaves through the building materials industry. As existing developments wrap up and fewer break ground, suppliers face weakening demand. With multifamily projects typically taking longer to complete than single-family homes, this shrinking pipeline signals sustained challenges for construction-related businesses well into 2025 and beyond.

Market headwinds reshape the deal flow

While established developers can still find funding, they face steeper borrowing costs and more stringent lending requirements. The new reality has forced both investors and builders to recalibrate their strategies, weighing higher capital expenses against future demand forecasts.

Strategic playbook: navigating the multifamily slowdown

For investors 

Focus on supply-starved markets showing strong population growth, particularly in the Sun Belt and high-migration metro areas. While new construction stalls, value-add plays on existing properties offer an attractive alternative path to capturing higher rents.

Build lasting relationships with proven developers who have weathered past downturns and explore creative financing structures like joint ventures or preferred equity. Though Year 1 returns may be soft, carefully selected assets in supply-constrained submarkets could deliver strong long-term growth.

For developers 

Cast a wider net for capital by tapping alternative funding sources like debt funds and private equity. De-risk projects through pre-leasing, phased development, and shorter build times.

Support funding requests with granular market data and conservative underwriting. Cut costs through modular construction and value engineering while pursuing local incentives and tax breaks to improve project economics.

For building materials suppliers 

Diversify beyond multifamily to serve single-family builders and renovation contractors. Invest in supply chain efficiency and shorter lead times to maintain competitiveness. Stock more energy-efficient and sustainable materials as developers prioritize operating costs. Focus on maintaining relationships with active developers and adjust inventory for regional construction patterns.

The road ahead

While today’s market presents hurdles for all stakeholders, those who adapt their strategies thoughtfully can position themselves to capitalize when supply constraints begin driving growth. Success will require careful market selection, creative approaches to challenges, and a steadfast long-term perspective.

Emerging solutions: Innovations reshaping multifamily development

The construction slowdown is spurring creative solutions across the multifamily sector. Coliving spaces are gaining traction, offering flexible housing that maximizes existing capacity while fostering community—particularly appealing in high-demand urban markets. Modular construction is cutting project timelines by half while reducing waste and costs, helping developers navigate tight lending conditions.

Green building practices are proving their worth beyond environmental impact. Energy-efficient systems and sustainable materials not only attract eco-conscious renters willing to pay premium rents but also qualify for regulatory incentives that offset rising costs. Meanwhile, tech innovations like Building Information Modeling (BIM) and IoT-enabled systems are streamlining everything from initial design to ongoing operations.

Cutting-edge techniques like prefabrication and 3D printing are pushing boundaries further, promising dramatically faster and more affordable construction methods. Many developers are finding success by combining these approaches—for instance, pairing modular designs with green materials or integrating smart home technology into coliving spaces. These hybrid strategies help future-proof developments while addressing immediate market challenges.

As the industry adapts to new market realities, these innovations offer more than stopgap measures—they’re laying the groundwork for a more resilient and sustainable multifamily sector.

Alternative housing solutions gain momentum

The multifamily construction slowdown is accelerating demand for housing alternatives, particularly single-family rentals and coliving spaces. SFRs are seeing surging interest, especially in suburban areas where families and remote workers seek more space and privacy. Investors have taken notice, increasingly adding these properties to their portfolios to capitalize on the growing demand.

Meanwhile, coliving spaces are emerging as an urban solution, offering affordability and community in high-cost markets. These shared living arrangements particularly appeal to young professionals and gig economy workers seeking flexible, cost-effective housing options. As traditional apartment development slows, developers are increasingly exploring these alternative models to meet evolving market needs and renter preferences.

This shift signals a broader transformation in residential real estate as the market adapts to fill the gap left by declining multifamily construction. Both SFRs and coliving spaces are moving from niche offerings to mainstream alternatives, reshaping how developers and investors approach housing solutions.

Looking ahead: opportunity in challenge

The 2024 multifamily landscape marks a pivotal shift in the market, with today’s construction slowdown setting the stage for tomorrow’s supply shortage. While tight lending and market headwinds continue to challenge developers and investors, the projected supply constraints by 2026 create a compelling case for strategic positioning now. Those who can read these market signals and act decisively may find themselves well-placed to capitalize on the next cycle.

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