Today’s edition sponsored by: JPI, Authentic, Hawthorne Residential Partners, GrottoAI and Foxen.
What’s Still Penciling Out?
It’s still a tough environment to get new apartment construction projects funded and out of the ground. Starts haven’t totally evaporated, but they’ve plunged dramatically nearly everywhere across the country – coming in around 10-year lows.
Naturally, I was curious to understand: What still works? What are the characteristics of projects that are still breaking ground of late? Deploying some help from my new friend Claude (plus some substantial additional elbow grease, thank you very much), I analyzed all the projects that started construction since the second half of last year. And I found six common characteristics for projects that still work. Here they are:
Friendly reminder: This is not investment advice. Just stuff I find interesting, and for informational purposes only.
1) They’re not located in Massachusetts
Apartment starts are still happening all across the country — Coasts, Sun Belt, Midwest — but with one notable exception: Not Massachusetts. Only 44 apartment units started construction in Massachusetts’ three largest MSAs during Q1’26, and that was the lowest number for any quarter since at least 2010 (and likely longer), according to RealPage. Even the state’s governor is seeing it.
Investing development capital in Massachusetts right now is like playing roulette with 8- and 9-figure checks. Why bother until after November? That’s when voters are likely to decide on a ballot measure that could install a particularly draconian version of rent control that caps rent growth at the LESSER of CPI or 5%. And it includes vacancy control – meaning (unlike in California, for example) rents couldn’t reset to market even after a move-out, so the cap still applies for new residents regardless of their income level. The measure exempts new construction for only 10 years, which torpedoes any real exit strategy for the developer.
If the ballot measure is approved, the state essentially becomes a no-go zone for development capital. Of course, market fundamentals still support additional supply. And developers continue to keep pre-development projects warm for now.
2) They’re Relying on Tax Incentives
Every bit helps these days, so tax incentives of all types (LIHTC, PILOTs, TIFs, OZs and other acronym programs) can really move the needle.
Yardi data shows capital A affordable housing (meaning subsidized, income-restricted housing like LIHTC) represents nearly one-in-five apartment starts, up from around 12% in the pre-COVID days.
We also see starts continuing within cities that offer useful PILOT (payment in lieu of taxes) programs, such as in Jersey City, NJ, where developers started a spurt of projects in hopes of beating the clock on a potential crackdown of the program backed by the city’s new mayor. Jersey City started roughly 7k units in the past 12 months, more than any other submarket in the country, and the city’s PILOT program is a big reason why those projects worked.
Similarly, TIFs helped keep projects going in places like Carmel, Indiana, a prime suburb of Indianapolis, as well as many other cities across the U.S.
And office-to-residential conversions (while still far smaller than vibes suggest) are happening in various cities thanks largely to a variety of tax and financing incentives. But they’re complicated, like this big tower in Downtown Milwaukee that just got announced. Getting it done required a HUD loan and a city TIF plus state and federal historic tax credits.
3) They’re in Mixed-Use, Master-Planned Developments
The third bucket also semi-relates to city tax policy, and that’s the master-planned Sun Belt development. I was surprised to see how much of this is penciling out, and the best example of that being Frisco, Texas (a prime suburb of Dallas), which had already built a lot in the last cycle and remains one of the hottest demand submarkets nationally.
There are a bunch of master-planned developments there (PGA, the Fields, Frisco Station, The Star, Railhead, etc.) where the developers and investors may have longer-term holds and less reliance on short-term rent trends. In other words, this is not your typical merchant build product nor is it your typical suburban garden deal. In fact, it’s mostly wraps (aka the Texas Donut). And there are some grants and TIFs often associated with them. Plus, some of them may have a long-term land owner where it’s therefore a favorable land basis.
And obviously it’s not just Frisco. You can find these types of projects scattered across the country from Seattle to Florida and many places in between.
4) They’re in Overlooked Submarkets
These are places that didn’t see much supply in the past cycle for various reasons, and now that’s part of the play – getting new development into areas that lack it.
That includes places like Torrance, California, which is part of the South Bay submarket of Los Angeles. We could also include places like Ventura County in SoCal and some of the more affluent suburbs of Portland, like Hillsboro and Lake Oswego. We also see it in secondary markets like Louisville, where the South Central submarket has seen a recent spike in starts. We could call out Newark, NJ, in this category as well. And we could keep going. It even includes some Sun Belt suburbs that didn’t see much supply in the prior cycle, and that’s where you could see more of that so-called commodity product getting built – lower density garden apartments on lower-cost land.
Here’s the key in this category: You just gotta be careful to pick places where the demand drivers are there to support it. In some spots, there’s a lack of supply for a reason.
5) There’s “The Story”
Some of you know where I’m going with this. This is a catch-all, but covers an important category here. Could be a distressed basis acquisition – maybe acquiring a fully entitled shovel ready site from a developer who doesn’t have the capital to start the project and needs an out. It could be a project being developed by or with a long-term land owner so therefore the land basis is basically zero. (After all: Acquiring land isn’t cheap. We’re not seeing huge discounts from land sellers, so long-term ownership of the parcel can be a difference maker.)
Or it could just be a very special project that is particularly unique in some way or another – either in physical attributes, location or capital structure. Everyone loves a good story, and a good story still sells.
6) They’re Making it Work: Value Engineering and Construction Efficiencies
This is a broad bucket, but an increasingly important one. It covers projects where developers have gotten creative to cut construction costs and make the deal work, either through value engineering or through construction efficiencies.
Your capital costs are what they are these days. The rents are what they are these days. So you gotta find ways to save on costs for these projects to make sense.
There are two ways to do that. One is value engineering. That means lower ceilings, smaller unit sizes, fewer amenities, lesser finish-out and other such cost-cutting tactics. That can work, but you must be careful to ensure your rents aren’t similar to nicer product built just a couple years earlier. Most renters will pick the nicer, larger unit if the price is comparable. You need a real rent discount to make these deals work. But, on the flip side, you also don’t want rents to be so low that you offset the cost advantages, either. So this one is tougher than it may seem to make work. But it can be done in the right spots, where it’s true workforce housing especially competing with 10-20+ year old product.
Another way to do this is through finding efficiencies within your construction process without sacrificing on the product itself. Large, sophisticated developers are using technology to reduce re-work and speed up construction timelines. Time is money, obviously. We’re still in the early innings here, but forward-thinking developers are finally finding ways to enhance productivity in an industry (construction) that has infamously achieved few such gains in past decades.
— My Latest Posts on LinkedIn —
Here are some recent posts if you missed them:
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Apartment loan originations are surging to near-record highs, as debt capital is abundant.
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Even The New York Times editorial board is coming out against rent control.
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While apartment ownership remains as fragmented as ever, the management business is becoming more consolidated.
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New “research” on the role of private equity grossly underestimates the role of private equity, and grossly overstates the implications.
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AvalonBay and Equity Residential are merging. That’s big news, but it also means it’s an uneasy time to be working at AVB or EQR.
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The U.S. House passed its own version of the ROAD to Housing Act, and while it’s better than the Senate’s, it’s still flawed.
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The New York Times tell us that rent is “swallowing up” income, but the reality is a lot more nuanced.
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Apartment REIT execs expect to see rents start to rebound in coming months.
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The apartment REITs offered up some good color on markets across the country, and it varies widely.
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Affordability is widely viewed as a headwind, but it’s becoming more of a tailwind for market-rate apartments and SFR.
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Reminder that there have always been fringe views among economists on rent control, but they’re just that.
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Give “mainstream media” some credit for getting the facts out there on build-to-rent and institutional SFR investors.
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While apartment completions are dropping off, there are still a LOT of active lease-ups trying to reach stabilized occupancy.
— Now Spinning on The Rent Roll Podcast —
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Thank you to everyone who’s made The Rent Roll part of your weekly routine! New episodes are released every Thursday morning.
Find us on YouTube, Spotify, Apple and Amazon. Recent episodes:
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