But now interest rates are dropping, the supply wave is crashing and costs are leveling off. Yet developers aren\u2019t jumping back in, and they may not for years to come.<\/p>\n
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Most builders will wait for even cheaper debt, stronger rent growth, improved property values<\/a>\u00a0and more eagerness from equity partners, hoping\u00a0market fundamentals will strengthen in the meantime.<\/p>\n The ongoing development slump may benefit those who can go against the grain.<\/p>\n \u201cNobody is doing the start volume that they would like to be doing, and that applies for us as well,\u201d said Philip Morgan, CEO of\u00a0Morgan Group<\/a>, a Houston-based firm with $4.5B worth of multifamily assets.<\/p>\n About 9,000 units were under construction in the third quarter, Houston\u2019s\u00a0fewest since 2011, according to Matthews<\/a>. Construction started on only 840 units during the quarter, a stark contrast to 9,288 starts during the first quarter of 2022.\u00a0<\/p>\n \u201cWhat\u2019s going to be delivered next year and the next three years is not a lot comparable to our population and what our normal trajectory is,\u201d Lincoln Property Co<\/a>. Executive Vice President Gabe Lerner<\/a> said.\u00a0<\/p>\n Groundbreaking activity in the first half of the year suggests a potential 15-year low for annual starts. This could help ease pressure on the 11.6% vacancy rate, which is at a 20-year high,\u00a0according to\u00a0Matthews<\/a>.\u00a0<\/p>\n Absorption outpaced new deliveries in the first half of 2025, but rent softness and elevated vacancies are expected to continue until supply moderates and demand fully catches up. Rents should stabilize next year, Matthews reported.\u00a0<\/p>\n Even if builders start to lean in now, it takes about a year to design and permit a development, plus another two years or so to build it, Lerner said.<\/p>\n \u201cIf you’re not buying land right now \u2026 you’re a year and a half away from even getting a shovel in the dirt, and you’re three years away from real supply,\u201d he said.<\/p>\n Developers have delivered about 11,000 units\u00a0in Houston this year and have fewer than 1,000 units slated for delivery in Q4, according to MMG<\/a>. This will bring deliveries well\u00a0below the region\u2019s historical annual average of about 20,000 units<\/a>.<\/p>\n \u201cThe reality is we could have another year, two, three or four of this type of volume, which will be good for fundamentals,\u201d Morgan said at the Houston Bisnow Multifamily Annual Conference this month at the Hyatt Regency Houston West.<\/p>\n Morgan Group has 10 active developments across Texas and Florida, down from its historical average of 20 to 25.<\/p>\n It has\u00a0another 10 developments in the planning phase and is recycling existing deals to rebuild its pipeline and have more starts in 2026, 2027 and 2028, anticipating the market will reward developments that get started in those years.<\/p>\n But it isn\u2019t easy being a first mover.<\/p>\n \u201cThe deals that are getting capitalized have to tick a lot of boxes,\u201d Morgan said.\u00a0<\/p>\n New developments need\u00a0to be in a great location with barriers to entry and low supply,\u00a0plus have a great basis. Morgan Group has gotten creative by\u00a0working with landowners or developers who control sites but have struggled to get a deal capitalized.<\/p>\n The firm also\u00a0has an in-house general contractor, and it is partnering with subcontractors to work out deals to satisfy return requirements for\u00a0itself and equity partners.\u00a0<\/p>\n \u201cThe bar is higher, and it’s harder to make deals work,\u201d Morgan said.<\/p>\n Capital providers have become more interested in development this year than they were last year, but their interest is still well below historical levels, he said.\u00a0<\/p>\n Rockefeller Group<\/a>, which is partnering with Pelican Builders<\/a> on a 298-unit multifamily project in Katy, is also trying to build, which is a bit of a bet, Senior Managing Director Philip Croker<\/a> said at the Bisnow event.<\/p>\n<\/p>\n