Lenders Enter 2020 Willing to Fund New Apartment Construction

As fears of a possible recession and overbuilding in the multifamily sector diminish, lenders are showing they still have an appetite for financing construction projects. The availability of mezzanine loans and lower interest rates are helping fuel this activity and helping to offset rising construction costs.

Exceptionally low unemployment has unlocked accelerated household formation, driving increased apartment demand. Vacancy rates stand at or near 20-year lows in most markets despite record construction levels, delivering steady rent gains in the 4 percent range. Workforce housing, particularly Class C properties, is poised to outperform in 2020 as much of the new housing demand will be concentrated in the most affordable segment of the market. In addition, the stock of Class C apartments has been shrinking as remodeling and upgrading these “value-add” properties has been a core focus of investors for the last few years. Vacancy rates for these assets will likely remain about 50 basis points below the national average for all property classes and deliver a rent growth premium in the 100-basis-point range.