Supply Drought Ahead? What the Construction Data Means for Your Property Value
Understanding the Market Split and What It Means for Multifamily Owners
If you own multifamily in the Bay Area, the recent construction data isn't just industry noise. It's a fundamental shift with major implications for your asset's value over the next 2-3 years.
What do these numbers actually mean for property owners? More importantly, why could understanding supply dynamics be the difference between holding or selling at exactly the wrong time?
The Supply Cliff Is Real
Multifamily construction starts dropped 30.4% month-over-month in May 2025, hitting just 316,000 units annualized (National Apartment Association). CBRE's forecasting annual deliveries falling to around 300,000 units by 2027—lowest we've seen in over a decade.
Here's the simple math: anything breaking ground today won't deliver until 2027-2028. And with project abandonments spiking 41.1% in November alone (ConstructConnect), we're staring at a multi-year supply drought. Construction starts are 74% below their 2021 peak, and deliveries are dropping from over 500,000 units recently to around 300,000 by 2027 (CBRE).
Two Different Risk-Reward Profiles
Sun Belt Markets: Short-Term Pain, Long-Term Flexibility
Austin, Phoenix, and parts of Dallas are dealing with a market surplus, and basic supply and demand is playing out exactly as you'd expect. Austin added 7.8% to inventory in a single year and just posted its eighth consecutive quarter of negative rent growth through Q1 2025. The numbers tell the story: rents dropped 5.5% year-over-year in Austin, Phoenix saw -2.4%, and Dallas fell 1.5% (Caliber, February 2025).
Here's where it gets interesting on the cap rate front. These oversupplied markets are trading at 5.5-6.5% cap rates (Terrydale Capital, November 2025). Austin's around 5.5%, Dallas-Fort Worth at 5.7%, and Houston at 6.5%. Those cap rates assume stabilized NOI 18-24 months out, and with rents currently declining 2-5% annually and vacancy rates at 11.6% in Houston, 11.8% in DFW, and 14.5% in Austin, you're underwriting to a turnaround.
But here's what makes these markets appealing for patient capital: they have landlord-friendly regulations, minimal rent control restrictions, and lower operating costs. Once supply is absorbed—and job growth projections of 1.5-1.8% support that absorption—operators have real pricing power. The risk is purely timing the bottom correctly.
If you own in these markets, you're facing 18-24 months of negative to flat NOI growth, but you're operating in environments where you can actually raise rents meaningfully once the market turns. Your property value probably won't recover until late 2026 or 2027 when the supply cliff materializes, but the recovery path should be straightforward once absorption catches up. The question is whether your hold period and financing can handle the wait.
Bay Area & Coastal Markets: Supply Constraint Meets Regulatory Reality
Markets that didn't overbuild are in a completely different position. CBRE's 2025 outlook shows coastal markets—Bay Area, Boston, New York, D.C.—looking at shrinking construction pipelines, strong renter demand, and accelerating rent growth in 2025. Way less new supply means way less competitive pressure, with rent growth averaging 3.1% annually over the next five years (CBRE).
Bay Area construction costs are among the highest nationally. High-rise multifamily in SF runs $380-$850 per square foot (Claris Design Build). Add the 9% tariff hit on materials as of September 2025 (Cushman & Wakefield), and new construction literally needs rents 30-40% above current market to pencil.
If your Bay Area property can't be replicated for less than $600K-$700K per unit, but you're seeing deals trade at $200K-$250K per unit, you own something that cannot be built at any profitable price point. That's a significant replacement cost advantage in a supply-constrained market.
But let's be clear about the trade-offs. Yes, you've got supply constraint and irreplaceable replacement costs working in your favor. But you're also navigating rent control in multiple jurisdictions, more restrictive landlord-tenant laws, higher operating costs—insurance, property taxes, labor—and limitations on rent increases in many cities.
The Bay Area thesis isn't that it's lower risk than Sun Belt markets. It's a different risk profile: you're betting on scarcity value and replacement cost advantage in a market with regulatory headwinds, versus betting on absorption timing in markets with operational flexibility. Both can work. It depends on your risk tolerance, hold period, and operating capabilities.
Why Construction Costs Aren't Coming Back Down
A lot of owners are waiting for construction costs to "normalize." Not happening. Materials costs jumped 9% from 2024 due to tariffs, with total project costs up 4.6% (Cushman & Wakefield, September 2025). JLL's latest forecast projects materials could rise another 5-25% through 2026 depending on the material, with an aggregate increase of about 8% based on current tariff levels.
That $400-$450K per unit construction cost from 2023? It's $500K+ now and likely climbing through 2026. Existing assets just got more valuable across all markets simply because replacement cost jumped—and it's not reversing.
The Timeline: What Happens When
We're currently in 2025 with multifamily starts at decade lows—316,000 annualized—and project abandonments up 41.1% in November. Oversupplied markets are bleeding with negative rent growth.
2026 is the likely inflection point. Completions start dropping hard as the first wave of the supply drought hits. Oversupplied markets finally start absorbing excess inventory, rent growth turns positive in balanced markets, and cap rates begin compressing in supply-constrained metros.
By 2027-2028, the delivery pipeline bottoms out at around 300,000 annual completions. Demand should exceed supply in most metros, and rent growth accelerates. CBRE's projecting 3.1% annually for well-positioned assets.
What You Should Actually Do Right Now
If you're thinking about selling: Your property's 12-18 months from a potential value inflection, whether you're in an oversupplied market waiting for absorption or a supply-constrained market waiting for cap rate compression. Unless you've got a capital need forcing your hand, waiting until late 2026 or early 2027 could mean better proceeds.
If you're holding long-term: Start preparing for the upcycle now. Refinance while you still can get reasonable terms—don't wait for rent growth. Make value-add improvements now because your ROI compounds with coming market rent growth (if your market allows meaningful rent increases). Lock in below-market debt before cap rates compress. And defer major capex that can reasonably wait until cash flow improves.
If you're looking to buy: This is your window in both market types. Distressed pricing on well-located assets won't last through 2026. In Sun Belt, you're buying the bottom with operational flexibility. In coastal markets, you're buying supply constraint with replacement cost advantage. Pick your risk profile.
The National Picture: Understanding the Split
The national multifamily market is splitting into two distinct stories, and neither is inherently "better"—they're just different risk-reward profiles.
Oversupplied markets (Sun Belt, Mountain states) are facing 24-36 month normalization timelines with near-term pain but landlord-friendly regulations that allow aggressive rent growth once supply is absorbed. Construction is down 33% in Mountain states, and markets with negative rent growth today position you for straightforward recovery once absorption happens.
Supply-constrained markets (coastal metros, high-barrier-to-entry markets) are facing 12-18 month inflection timelines with CBRE's projected 3.1% annual rent growth, but you're operating in environments with regulatory constraints on rent increases and higher operating costs.
We've got a rare alignment happening right now across both market types. Discounted pricing from 2023-2024 rate-driven distress. Supply constraint from construction collapse with starts down 30.4%. A permanent cost barrier from tariffs with materials up 9%. And demand support from housing shortage and demographics.
This combination doesn't happen often. The last time construction stopped this abruptly was 2008-2010, and multifamily buyers who entered the market in 2010-2011—in both coastal and Sun Belt markets—captured strong returns through the recovery cycle.
The Bottom Line
This construction collapse is reshaping multifamily property values over the next 36 months, but the path forward depends heavily on which market you're in and which operational levers you can pull.
If you own Bay Area multifamily, your property's positioned for potential appreciation based on three factors: irreplaceable replacement costs ($600K-$700K+ to build vs. current pricing), supply protection (no new competition for 3+ years with starts at 316K annualized), and demand support as employment infrastructure grows while residential supply craters. But you're operating in a regulated environment where your ability to capitalize on rent growth is constrained.
If you own Sun Belt multifamily in oversupplied markets, you're facing near-term pain but have operational flexibility that coastal markets don't. Once absorption happens—likely late 2026 or 2027—you can raise rents aggressively without the regulatory constraints that limit coastal operators.
That 41% spike in construction project abandonments in November means new development competition just left the market for half a decade across all metros. CRE's expecting above-trend rent growth of 3.1% annually over the next five years, driven by supply-demand imbalance.
Based on these supply dynamics and replacement cost fundamentals, the question isn't which market is "better." The question is which risk-reward profile fits your investment strategy, hold period, and operational capabilities—and whether you're positioned to hold long enough to capture the value appreciation that should come from this unprecedented supply constraint.
Legal Disclaimer This newsletter is for informational purposes only and does not constitute legal, tax, or financial advice. The information provided is based on publicly available sources and is subject to change. Always consult with a qualified tax professional, attorney, or financial advisor before making investment or tax-related decisions. Ownership Theory assumes no liability for any actions taken based on this content.
PRIMARY SOURCES (2025 Data):
National Apartment Association - Multifamily Construction Trends: Summer 2025 https://naahq.org/news/multifamily-construction-trends-summer-2025
CBRE - U.S. Real Estate Market Outlook 2025 - Multifamily https://www.cbre.com/insights/books/us-real-estate-market-outlook-2025/multifamily
ConstructConnect - Project Stress Index Rises Sharply in November (December 2025) https://news.constructconnect.com/project-stress-index-rises-sharply-in-november
TheGuarantors - Multifamily Supply Surges as New Construction Falls Hard (2025) https://www.theguarantors.com/blog/owners-and-operators/multifamily-supply-surges-as-new-construction-falls-hard
Claris Design Build - [2025 Update] Commercial Construction Cost per Sq Ft in the US (Sept 8, 2025) https://www.clarisdesignbuild.com/2025-update-commercial-construction-cost-per-square-foot-in-the-us/
Cushman & Wakefield - The Impact of Tariffs on CRE Construction Costs (Sept 30, 2025) https://www.cushmanwakefield.com/en/united-states/insights/the-impact-of-tariffs-on-cre-construction-costs
247Pro - Your State-by-State Guide to Construction Costs (Feb 20, 2025) https://www.247pro.com/blog/your-state-by-state-guide-to-construction-costs-and-calculations-in-the-us
CRE Daily - Project Abandonments Rise Amid Tariff Pressure (Dec 11, 2025) https://www.credaily.com/briefs/project-abandonments-rise-amid-tariff-pressure/
ConstructConnect - Regional Construction Starts, US Nonresidential - December 2024 (Jan 2025) https://www.constructconnect.com/construction-economic-news/regional-construction-starts-us-nonresidential-december-2024
Caliber - 2025 Outlook for the Multifamily Sector (Feb 4, 2025) https://www.caliberco.com/2025-outlook-for-the-multifamily-sector/
Terrydale Capital - Texas Commercial Real Estate Outlook November 2025 https://terrydalecapital.com/market-updates/texas-commercial-real-estate-q4-2025
Fannie Mae - Multifamily Economic and Market Commentary January 2025 https://www.fanniemae.com/media/54646/display
