Developers Sit on Empty Lots After Historic Apartment Boom

Higher interest rates and flattening rents scuttle projects

By Will Parker, June 4, 2024 5:30 am ET

Seattle-based developer Tyler Carr set out to build apartments in Boise, Idaho, where rents were rising the fastest in the country. In 2021, his company bought land near the growing downtown with plans to develop 104 rental units.

Three years later, his land remains an empty lot. When market conditions deteriorated, his strategy no longer made financial sense. Interest rates and construction costs rose, Carr said, “and those two things really converged to make the project unviable.” 

During the biggest apartment construction boom in decades, a growing number of developers can’t make the numbers work to get started on their project, or can’t get the money to complete them. Higher interest rates, tighter lending conditions and flattening rents in parts of the country have left property companies from California to Florida waiting for financing that might not come soon.

The amount of time the average apartment project spends between construction authorization and when construction begins has risen to nearly 500 days, a 45% increase from 2019, according to property data firm Yardi Matrix.

Developers also are launching fewer projects amid the financing crunch. Multifamily building starts fell to an annual rate of 322,000 units in April, the lowest April rate since 2020, according to the Census Bureau.

While most developers get tripped up before real activity begins, a few have found trouble after starting construction, leaving them with half-built properties. In downtown Phoenix, work stopped last fall at a 25-story apartment tower that was most of the way up. Contractors filed claims for millions of dollars over unpaid work.

“We certainly are seeing a decline in construction,” said Robert Dietz, chief economist at the National Association of Home Builders. “Deals and financing have dried up.”

Some decline was inevitable. About half a million new apartments opened in 2023, the most in 40 years. Based on what is already under construction, analysts expect a similar number to be completed in 2024. 

In some cities, the surge in building has meant there are more apartments than can be quickly leased without cutting rents, making some investors skittish about adding more units. 

But banks have other issues that keep them from lending as much to apartment builders this year. Many regional banks are souring on the commercial real-estate loans already on their books. 

“Their current portfolios are getting marked down and they don’t have that much to lend,” said David Frosh, chief executive of Fidelity Bancorp Funding, a California real-estate lender.

That means developers need to raise more cash from investors to build. But many investors are more cautious today, as rent growth flattens and new projects look less profitable at today’s higher interest rates and construction costs. 

“The numbers don’t add up,” Frosh said.

In Worcester, Mass., about a dozen apartment projects with more than 2,000 units are delayed, according to a May report from the city’s economic-development office. Struggling projects include buildings with as many as 200 market-rate apartments and affordable housing, said Joshua Lee Smith, a real-estate attorney working with developers who have stalled projects in Worcester.

“The interest rates are at a point where a lot of investors are sitting on the sidelines,” he said. 

Cities like Worcester and Boise, whose relative affordability has attracted droves of newcomers in recent years, had been overdue for a spate of new housing construction. In August 2021, annual asking rent growth in Boise hit a record of 25%, according to property software company RealPage. Home prices in its surrounding county shot up 79% in three years between 2019 and 2022. 

Encouraged by that strong demand, apartment construction has also increased in the Idaho capital. But like Carr, the Seattle developer who came to Boise, some builders are running into problems.  

In late 2022, Boise apartment developer Galena Opportunity was about a third of the way through construction of a 350-unit project, when a major investor decided to back out. Contractors filed millions of dollars of claims against the company for portions of unpaid work, and cranes came down. 

The project, in the Boise suburb of Meridian, remains stalled while Galena tries to court new partners. Galena is proposing other changes to its plans to bring down construction costs, such as switching up the materials it had originally chosen for the building’s facade, said Bill Truax, the company’s president. 

He hopes to resume construction with the help of new investment later this year. Other builders have made bigger changes to save their projects, including Carr. 

His company is refashioning part of its Boise development into affordable housing, so it qualifies for government tax credits. That means the company doesn’t need to put up as much equity to move forward. Carr hopes to start building by the fall. 

“It’s been way more brain damage,” Carr said. “But I see it as this great opportunity. I’m sinking my teeth into something new.”

Write to Will Parker at will.parker@wsj.com