Credit Crunch Begins to Show Up in Housing Starts

WASHINGTON, DC-The decline in construction starts for apartment buildings isn’t as steep as in the single-family home market, but it is nonetheless significant. According to the latest data from the US Census Bureau and the Department of Housing and Urban Development, starts on residential structures with five or more units dwindled to 251,000. That’s a 16.5% drop from the 301,000 units in July, and a 24.4% decline from August 2007, when developers began work on 332,000 units.

Yet it isn’t sagging demand that’s driving developers to hold or cancel projects. Just like in the stalled sales market, the lack of financing is one of the main factors in keeping starts down. And given market conditions, new starts should continue to dwindle, says Sharon Dworkin Bell, senior staff vice president for multifamily at the National Association of Home Builders. “We’re hearing anecdotally from our members that the lack of financing is having a substantial impact on starts, but it really hasn’t began to show up in a meaningful way in the national numbers,” she states. “The impact will probably be more noticeable in the third-quarter figures because developers are canceling or not moving forward with planned projects due to the financing situation.”

Commercial banks, which have typically provided debt for construction, have tightened their lending criteria significantly, and that’s severely restricted cash flow. “There are still deals getting financed, it’s just more difficult,” says Bell. “In the past, developers would solicit maybe a handful of banks to get financing. Now they have to go out to 10 times as many institutions to get money.”

In addition to the slower pace of new starts, the type of product that is being built has changed. Bell observes that developers, due to the higher cost of concrete and steel, are increasingly opting to construct smaller, low to mid-rise communities, rather than high-rise properties.

The credit crunch isn’t only impacting market-rate communities; projects utilizing low-income housing tax credits are also having a more difficult time securing the equity needed to support those deals. Equity for those projects comes from the proceeds from the sale of tax credits primarily to financial services companies. “Those firms buy the credits because it’s an investment in the industry and it helps to offset their profit for the year,” says Bell. “But a lot of the financial services companies are either going out of business or not showing the same profits as they were, so their appetite for tax credits is waning. With fewer companies buying tax credits, it translates into less equity available for deals. That means a great many LIHTC properties will not get built this year.”

Developers are trying to find other companies to buy the tax credits and invest equity, but it’s a long learning curve, says Bell. “We’ve also been in touch with the new regulator of Fannie Mae and Freddie Mac, which were the two major buyers of tax credits, to let them know how important it is that they continue to hold onto the credits they already own in order to not further depress the market,” she says.

The financial rescue package, she adds, will be “instrumental in helping to break the logjam and get capital flowing again” for both market-rate and affordable residences. “That should release a lot of pressure on the debt side of the equation, help stabilize the financial services companies and banks, and increase their appetite for buying tax credits.”