According to National Real Estate Investor, there will be more new apartments opening up in 2017, the most in almost ten years, based on a 20.4 percent increase in 2017 construction completions. However, while banks continue to fund construction loans for new apartments, they are getting more expensive, and the numbers of new apartment don’t bode as well for 2018.
The construction loans climate is a major reason for a forecasted dip in the number of new apartment units that will open in 2018. Relying on recent information from research firm Axiometrics, the number of new apartments opening in 2018 will decline to 271,842 — from 389,723 in 2017. There has been a , the most since 2007.
National Real Estate Investor indicates that a root cause of the developer pull back can be traced back to the short-term interest rates have gone up as the U.S. Federal Reserve raised their benchmark interest rates. The Federal Reserve may soon raise rates again.
Other financing factors tightening apartment development are:
- Construction loans no longer cover up to 70 percent of the cost of development, it’s more like 55 percent to 65 percent of construction cost.
- Most banks are charging a spread of more than 300 basis points over London Interbank Offered Rate (LIBOR, a benchmark interest rate index), up from spread of 175 to 200 basis points two years ago.
- Bank loans continues to shrink relative to the cost of developing a property, meaning developers need to put down more on their construction projects, or bring in equity partners.
Demand for new apartments is still high, however, and regional banks and some life insurers are offering developers alternative financing.