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The potential for continued high levels of multifamily development and high occupancy rates declined in the third quarter, according to the National Association of Home Builders’ (NAHB’s) Multifamily Market Survey. The Multifamily Production Index (MPI) decreased 10 points to 32 compared with the second quarter, while the Multifamily Occupancy Index (MOI) fell 15 points to 45.

The MPI measures builder and developer sentiment about conditions in the apartment and condo market on a scale of 0 to 100. According to the NAHB, the index and all of its components are scaled so that a number below 50 indicates more respondents are reporting that conditions are getting worse rather than improving.

“Multifamily developers are becoming cautious, as supply constraints have caused a large backlog of projects started but not yet completed to accumulate in the pipeline,” said NAHB chief economist Rob Dietz. “An emerging additional constraint is financing for new multifamily development, which 79% of developers say is somewhat or significantly less available than it was a year ago. NAHB is projecting a significant decline in multifamily starts in 2023.”

The MPI is a weighted average of three key multifamily market elements: construction of low-rent units—apartments that are supported by low-income housing tax credits (LIHTCs) or other government subsidized programs; market-rate rental units; and for-sale units—condos. All three components saw decreases from the second quarter, with the component measuring low-rent units falling nine points to 36, the component measuring market-rate units dropping 13 points to 39, and the component measuring for-sale units declining 10 points to 23.

The MOI’s 15-point decrease from the second quarter means it’s at the lowest level since the first quarter of 2010, with the exception of the start of the pandemic in spring 2020. The MOI measures the multifamily industry’s perception of occupancies in existing apartments. It is a weighted average of current occupancy indexes for Class A, B, and C units and can vary from 0 to 100, with a break-even point at 50, where higher numbers indicate increased occupancy.

“Although demand for multifamily housing remains strong in many parts of the country, some multifamily developers are starting to see signs of a slowdown,” said Sean Kelly, NAHB Multifamily Council chairman and executive vice president of LNWA, based in in Wilmington, Delaware. “The ongoing problems of scarcity and high cost of land and materials is making it difficult to go forward with certain projects, particularly affordable housing projects.”