Multifamily development ever make sense again in oversupplied markets?

Wouldn’t it just require a trended outlook in a decreasing interest rate environment? Guess it also depends on the submarket and whether we’re talking garden, gurban, wrap, podium… It might be rather slow to start, but at some point developments will pick up in oversupplied markets again.

Tangentially, people who get started in the near term will have a lot of runway in the foreseeable future. Probably will be a buyer’s market for a while. I think we’re starting to see this trickle out over the last month or so, as seller’s are just plainly running out of time.

I think “never makes sense again” is an overused term. As long as the U.S. and those cities continue to see population growth you at some point in time are going to grow into the supply, the only question is when. 

That being said, population growth has been almost entirely fueled by immigration the last couple decades. Do Trump’s policies in the long-run make a serious dent in immigration? Do we start seeing more legal immigration? Does this all blow over in the next presidential cycle? There are a lot of unanswered questions on immigration right now that could impact population growth. 

Even without population growth, eventually old product becomes obsolete and people build new stuff. Population growth in most of Europe has been mild to non-existent the last half century but people still build things.
 

Will multi dev ever make sense again in oversupplied markets where costs are 10-15% above values today? Hard costs are not going down, cap rates have more or less settled, and outsized rent growth over the long run is less likely. I’m also less bullish on supply cliff induced rent growth given macro uncertainty and the extended record absorption needed to fuel it.

None of this actually means these markets are "oversupplied".  It could be that.  It also could be that crappy developers jumped into some of these markets in the expectation that they could underwrite whatever absurd assumptions they wanted, and now are stuck in a place where they can't actually lease units at a price that makes economic sense for them.

I have a suspicion that if owners lowered asking rents by 20% they'd have very little problem filling their units.  It's just that MF owners can't get away indefinitely with the 7-8% increases they'd gotten used to.

This is coming from a heavily biased point of view so take with grain of salt but the bull argument is that these markets are not oversupplied, they just had an absurd amount of supply hit the market all at once.  The demand side of the equation is still strong, the market just needs a bit of time to work through all the new supply.  With new starts dropping off a cliff putting a shovel in the ground sometime late 25/early 26 sounds like a pretty good bet. 

Everyone is commenting on supple dynamics, which is definitely relevant, but I'd like to push back on the idea that hard costs aren't going to come down. As someone who came from construction I can tell you that sub pricing is far more dynamic than you might imagine. Actual material costs are probably only between 1/3-1/2 of the total bill, depending on the trade. Those typically don't go down, true (unless they're directly correlated with commodity markets, i.e. copper pipe price will fluctuate with the cost of copper), but they have other ways of making the numbers work. 

One big thing is a lot of subs are stuffing their budgets, they've got profit centers in far more line items than just their 5%, and those start to slim down once work starts to dry up. Small business owners aren't dumb and they know sometimes they need to cut back to keep the business rolling. Especially in severe downturns they'll often take jobs that basically just cover material and labor (i.e. no profit) to keep their guys employed through the rough times, no business owner wants to be caught flatfooted when the good times start rolling because that's where they really make their nut. It's not always the case, some are just stubborn, some don't have a choice, others aren't as far-sighted, but enough subs understand the market so that when work dries up entirely they start to get better pricing. 

A good GC knows how to push on subs to get the best pricing, and a good developer knows how to push on a GC to cut the fat they're carrying as well. It's all about cycles, there are good times and bad times, but you can make money at any point in the cycle if you understand what's fundamentally happening.