builders are betting on multifamily

The latest residential housing construction report showed starts climbed year-over-year, reaching a five-month high in July, with multifamily projects in particular leading the way.

Yet this pickup comes against a backdrop of developer caution, as high interest rates and rising construction costs have made homebuilding especially challenging in recent years. At the same time, low transaction volume in housing markets has led to a growing supply of newly completed but unsold single-family homes. That inventory reached 511,000 nation-wide in June—the highest level since October 2007—and it continues to climb. Many developers are looking to work through their existing stock, or for the broader market to digest inventory, before breaking new ground. 

The recent housing report, however, showed a divergence in building trends. Single-family construction remains historically weak, up just 8% from June 2024. Multifamily construction (projects with 5 or more units) drove the overall increase, jumping 27% year-over-year to its highest level in over two years. July marked the second straight month of double-digit gains for multifamily, while the number of single-family homes currently under construction fell to its lowest level since 2021. 

Much of the divergence in building trends reflects consistent demand for rental housing. Many would-be buyers, sidelined by high mortgage rates, are renting for longer. In addition, years of below-average multifamily construction have created expectations of future rental gains. Though rental appreciation has slowed recently after the run-up during and following the pandemic, developers are anticipating appreciation to return in 2026 as limited new supply puts upward pressure on rents.

How long this uptick in building activity will continue remains a question, however. Multifamily starts are notoriously volatile, given the potential scale of each project. And the housing report also showed that total permits issued, which is a leading indicator of future building, fell 2.8% to a five-year low of 1.35 million units, led by a drop of nearly 10% in multifamily permits.

For now it seems unlikely that homebuilding, particularly in the single-family segment, should consistently return to levels seen before the Federal Reserve began raising interest rates in 2022, absent a broader shift in market conditions. While the large stock of unsold homes may weigh on home prices in the short term, a continued slow pace of new construction suggests values could face upward pressure further down the line.