The New Math of Building Apartments in America: Feasibility Crisis and the Coming Supply Cliff.

New multifamily townhomes with desert landscaping and "Now Leasing" signage in a Sun Belt market.

Most multifamily deals no longer pencil — and that's setting up the next housing shortage. Construction starts have plunged 74% from their 2021 peak, according to CBRE, even as the country added a record 685,000 apartment units in 2024 alone. The culprit is a feasibility crisis: construction costs up 30% in five years, interest rates that have doubled borrowing expenses, and a regulatory environment that adds 40.6% to development budgets before a single nail is driven. Yet for developers who can navigate today's brutal math, the window is opening. Deliveries will fall to roughly 330,000–440,000 units by 2026–2027, and the markets absorbing supply fastest — Chicago, New York, the Midwest — are already posting rent growth above 3%. The question isn't whether apartments are needed. It's whether anyone can afford to build them.

A $400,000-per-unit problem with no easy fix

The national average all-in development cost for a mid-rise apartment now runs $300,000 to $500,000 per unit, depending on market and building type. A six-story, 143-unit podium building costs roughly $423,000 per unit in Portland, $490,000 in Seattle, and $471,000 in Sacramento, according to a 2024 BAE Urban Economics study. Gateway cities are far more punishing: a RAND Corporation analysis published in April 2025 found that California is 2.3 times more expensive than Texas for multifamily construction, with municipal impact fees averaging $29,000 per unit versus less than $1,000 in Texas.

Hard construction costs typically consume 50–70% of the total budget, with soft costs (architecture, permitting, legal, financing) taking 20–30% and land absorbing 10–20%. But those ratios obscure wild geographic variation. In San Francisco, per-square-foot construction costs exceed $450, roughly double Phoenix's $218. The Turner Building Cost Index shows annual construction inflation running at 3.3% to 4.7% through 2024–2025, with the ULI reporting that tariff pressures pushed multifamily cost inflation above 4% in 2025. Net inputs to multifamily construction are now up 50% from a decade ago.

The cost story gets worse when you factor in regulation. A joint NAHB-NMHC study found that government regulation accounts for 40.6% of multifamily development costs on average — up from 32.1% in prior surveys. Building code changes alone represent 11.1% of total costs, while NIMBY opposition, encountered by 74.5% of developers, adds 5.6% and delays projects by an average of 7.4 months. Nearly 94% of developers report needing to rezone land after acquiring it, a process that layers months of uncertainty and cost onto every deal.

Where to build matters more than ever

Site selection has become a story of two Americas. The Sun Belt, which captured 80% of U.S. population growth over the past decade and gained 2.7 million net domestic migrants between 2020 and 2024, dominated development pipelines. But that building boom has created acute oversupply. Austin's vacancy rate hit 15.3% with rents down 6.3% year-over-year. Atlanta reached 12.5% vacancy, Jacksonville 13.4%, and Phoenix 11%. Five of the top ten weakest rent-growth markets are in the Sun Belt.

Meanwhile, supply-constrained Midwest and Northeast markets are outperforming dramatically. Chicago posted 8.1% effective rent growth in Q2 2025 per Berkadia. Northern New Jersey saw 6.5% growth, and Cincinnati, Omaha, and Lexington each exceeded 6%. Brooklyn's vacancy sits at just 2.6%. The pattern is clear: markets that never overbuilt are now reaping the rewards of discipline.

For developers evaluating sites, the data points toward several criteria. Walkability commands substantial premiums — 30.4% of all multifamily rentals in the 35 largest metros sit in walkable urban locations, per a Places Platform/MHN study, with NYC at 70% and Chicago at 45%. The homeownership affordability gap continues to feed rental demand: average apartment rent runs $1,200 below the monthly mortgage payment on a median-priced home, and only 28% of U.S. households qualify for a mortgage at today's prices, according to Freddie Mac. The prime renter cohort (ages 20–34) stands at 68 million and is projected to grow through 2032.

Emerging markets worth watching include Tucson (investment price per unit up 131%), Knoxville (4,575 units in pipeline, 96% occupancy), Lafayette, Indiana (98% occupancy), and White Plains, New York (6,885 units under construction with NYC spillover demand). Opportunity Zones now account for 23% of all new multifamily units under construction, up from 8% when the program launched, with the One Big Beautiful Bill Act making the program permanent.

Zoning reform is slowly unlocking supply

The fact that roughly 75% of residential land in American cities is zoned exclusively for single-family homesremains the foundational barrier to apartment construction. But the reform wave is accelerating. Minneapolis eliminated single-family zoning in 2020, and a 2025 academic study found the plan lowered housing cost growth by 16–34% relative to a synthetic control. Oregon's HB 2001 requires all medium and large cities to allow duplexes through fourplexes, with all 56 affected jurisdictions now in compliance. Montana's bipartisan 2023 reforms mandate duplex zoning statewide and require cities to allow ADUs, with $225 million in authorized housing spending.

California's SB 9 — which requires ministerial approval of up to four units on single-family lots — has seen modest uptake, with fewer than 500 homeowners applying statewide by mid-2024. But the state's 2025 CEQA reforms (AB 130 and SB 131) could prove more consequential, with the ULI estimating they'll reduce entitlement timelines by 12–18 months. New York City's "City of Yes" plan, approved in December 2024, aims to create 80,000 new units over 15 years by eliminating parking mandates in transit-rich areas and allowing ADUs citywide.

Parking reform deserves particular attention. Over 50 U.S. cities have now eliminated parking minimums, with Austin becoming the largest city to do so citywide in November 2023. Structured parking adds $50,000 per unit on average, and underground garages can cost $60,000–$120,000 per space. The Sightline Institute estimates that parking reform alone can boost homebuilding by 40–70%. Colorado's HB 1304 eliminates residential parking mandates near transit across 70–80% of Denver, effective mid-2025.

Eighteen states have now passed ADU legislation, with 11 adopting laws in just the past four years. California leads with over 80,000 ADUs permitted since 2016. Massachusetts legalized ADUs under 900 square feet by right statewide in 2024, generating 1,639 applications and 1,224 permits in the first year.

The feasibility gap that's throttling construction

The core challenge is arithmetic. Developers target a yield-on-cost of 6.5% or higher — the stabilized net operating income divided by total development cost. With stabilized cap rates sitting at 5.0–5.6% nationally (CBRE reports a core going-in cap rate of 4.90% as of Q4 2024), the development spread — the premium over what you could buy an existing building for — has compressed to roughly 100–150 basis points in many markets. In 2021, developers could tolerate thinner spreads because financing was cheap and rent growth ran above 4%.

Today, construction loan rates run SOFR plus 250–400 basis points depending on lender type, translating to roughly 6.5–8.5% all-in. National banks require full recourse and offer 70% loan-to-cost; HUD's 221(d)(4) program provides the best terms at 87% LTC for market-rate projects (recently increased from 85%), but demands extensive documentation and longer timelines. The result is widespread negative leverage: cap rates below borrowing costs, meaning debt dilutes rather than enhances returns.

Lenders require debt service coverage ratios of 1.20x–1.25x for permanent financing, with HUD at 1.176x for market-rate deals. Developers targeting levered IRRs of 15–20% increasingly find those returns achievable only with below-market land bases, creative financing, or aggressive rent growth assumptions. In Massachusetts gateway cities, the financial gap for new rental housing averages $212,000 per unit, per MassINC. The NMHC's March 2024 survey found 74% of developers citing economic infeasibility as the primary reason for construction delays.

A supply cliff is forming — and smart capital knows it

The national pipeline tells the story of what comes next. Units under construction peaked above one million in late 2023 — the highest since 1973 — and have since declined to 690,000 as of December 2025. Multifamily permits climbed 15.2% in 2025 to 567,000 units, signaling some recovery in intent, but actual starts remain depressed. Developers broke ground on just 234,900 market-rate apartments in the twelve months through Q3 2025, the lowest volume in over a decade, per Marcus & Millichap.

The absorption side has been remarkable. CBRE recorded 188,200 units absorbed in Q2 2025 — the strongest second quarter on record. Full-year 2024 absorption hit roughly 557,000–667,000 units depending on source, a 70% increase over the prior year. Demand exceeded new supply for four to five consecutive quarters starting in late 2024, and vacancy has fallen from its 2024 peak.

Institutional capital is taking notice. Multifamily investment volume reached $108 billion through the first three quarters of 2025, up 7.5% year-over-year per CBRE. Blackstone's $10 billion acquisition of AIR Communities in 2024 signaled conviction. Private fund vehicles targeting North American real estate hold $274.5 billion in assets under management with substantial dry powder, per Newmark. Multifamily remains the most preferred commercial real estate asset class in 2025 investor surveys.

The setup is increasingly compelling for developers who can solve the feasibility equation. Deliveries are projected to fall to 319,000–441,000 units by 2027 — potentially a ten-year low. Projects started today would deliver into a market with sharply constrained new supply and strengthening demand fundamentals. CBRE expects above-average rent growth in 2026 and projects 2.8% annual increases over the next five years. The developers who find workable sites in supply-constrained markets, navigate the zoning gauntlet efficiently, and secure creative financing structures are positioning themselves for the strongest lease-up environment in years. The math is hard right now — but the math of 2027 could be very different.

A rigorous multifamily feasibility study quantifies these dynamics at the site level — validating demand, stress-testing construction economics, and producing the bankable feasibility analysis lenders require before committing capital.

Sources:

• RentCafe / Yardi — Supply pipeline by metro

• Green Street — REIT-level analytics, cap rate data

• MSCI Real Capital Analytics — Transaction volume tracking

• National Apartment Association (NAA) — Apartment Market Pulse (Spring/Summer 2025)

• National Multifamily Housing Council (NMHC) — Quarterly Construction Survey

• Urban Land Institute (ULI) — Emerging Trends in Real Estate 2025

• Sightline Institute — Parking Reform Research

• Parking Reform Network — Colorado HB 1304 Analysis

• Planetizen — 2024 Year in Zoning Review

• Urban Institute — Oregon Housing Options Expansion Study

• Gibson Dunn — California Zoning Legislation Analysis (SB 9, SB 10)