Aug 22, 2023 - Development

New apartment construction nosedives across West Coast cities

Apartment construction starts in select West Coast markets
Data: CoStar; Chart: Axios Visuals

New apartment construction is plunging in the West Coast's biggest metro areas after officials spent years trying to combat soaring rents.

Why it matters: West Coast metro areas are already grappling with a housing shortage that's driving an affordability crisis, and experts say the apartment construction slump will make things worse.

  • "If you think the housing crisis is bad now, just wait a few more years," said Muhammad Alameldin, policy associate with the Terner Center for Housing Innovation at UC Berkeley, who studies housing construction costs.

Driving the news: High interest rates and the rising costs of labor and materials are forcing developers to pull back on apartment projects throughout the West Coast, according to new data on construction starts from CoStar Group, a real estate information company.

  • Developers are on pace to start building fewer than 20,000 apartments combined this year in Los Angeles, San Francisco, San Diego, San Jose, Seattle, and Portland — less than a quarter of what those locations together produced a year earlier.
  • CoStar's data for each metro area covers projects of five or more units.
  • The West Coast's decline in construction starts is outpacing the rest of the nation's, CoStar's data shows.

Context: 2023 has so far produced less than half as many apartments as the first two quarters of 2018, the year that was the last decade's high mark for apartment starts in those metro areas. This year's tally, 9,361, even falls considerably short of the 13,958 starts recorded in the first half of the pandemic-plagued 2020.

By the numbers: The intensity of the slowdown in each city varies.

  • San Diego started construction on 1,150 apartments in the first half of 2023, versus 3,031 in the same period last year.
  • The same comparison for Seattle is 3,493 versus 8,404, for Portland 1,722 versus 5,132, for San Francisco 229 versus 1,846, and for Los Angeles 2,767 versus 5,305.
  • Developers haven't broken ground this year on a single apartment building in San Jose, which by this time last year had 2,272 starts, according to CoStar's data. But Housing and Urban Development Department data shows that the city has issued permits for 977 apartment units in the first six months of the year.

Zoom out: The West Coast's share of the nation's apartments under construction has fallen from nearly 10% in 2014 to 4.45% currently, CoStar Group found.

What they're saying: Costs are forcing developers to abandon projects right before they're ready to build, said Joshua Ohl, a San Diego analyst for CoStar Group.

  • "Construction financing is extremely difficult right now — even developers with strong balance sheets are having a hard time getting debt for construction," Ohl said.
  • "One of the riskiest things to lend to is construction, and the returns on construction loans aren't as high as other sources," UC Berkeley's Alameldin said.
  • Pandemic retirements and insufficient training in recent decades to replace an aging construction workforce are driving a labor shortage, he added.

The bottom line: Even in the short term, the construction downturn could make the apartments that are built even pricier, since that's the easiest way to make a project feasible again, Alameldin said.

  • Not helping is the recent increase in interest rates, which have "had an impact on the ability for many projects to pencil out," said Elliot Krivenko, CoStar's Seattle analyst.

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