The Supply Constraint Is Now: What Tariffs, Construction Costs, and a Contracting Pipeline Mean for Your Portfolio

The multifamily pipeline is contracting. Starts have dropped. Construction costs have moved sharply higher. And tariffs on steel, lumber, and imported building materials are adding cost pressure that most developers did not underwrite for — and cannot absorb without repricing their projects or shelving them entirely. For operators who already own stabilized assets, this is not a headline to read and move past. It is a structural shift that directly affects vacancy pressure, rent growth trajectory, and the competitive positioning of existing inventory over the next 24 to 36 months. In this episode, Louis breaks down what is actually happening in the construction pipeline right now, how tariff-driven cost increases are translating into fewer deliveries, and what that means at the portfolio level for operators who are watching their occupancy, rent renewal conversations, and long-term asset value. Covered in this episode: 

1. Why multifamily starts have declined and what the current pipeline looks like compared to 2021–2023 peak delivery years
2. How tariffs on steel, lumber, and imported materials are repricing construction economics — and why some projects are being paused or cancelled entirely
3. The lag effect: why today's contracting pipeline won't show up in occupancy and rent data for 12–18 months, and how to position for it now
4. What a supply-constrained environment means for existing asset holders — rent growth, concession burn-off, and the competitive dynamics of being the supply that already exists
5. How to evaluate whether your portfolio is positioned to benefit from reduced new supply or exposed to markets where deliveries are still elevated
6. The difference between markets where the constraint is already binding and markets where the pipeline is still working through excess

 This episode is for operators who want to understand how the macro construction environment is reshaping portfolio economics — and what to do about it before the data becomes obvious to everyone else.

BHPA - https://bhpropertyadvisors.com/

Transcript

SPEAKER_00 0:00

Welcome to Beyond IRR. This podcast examines real estate investments through the lens of structure, risk, and capital durability, not just headline returns. I'm your host, Louis Heiza. This podcast is sponsored by Beacon Hill Property Advisors. There's a moment in every real estate cycle where the conventional narrative and the actual data start pulling in different directions. And I think we are in one of those moments right now. And I want to spend this episode walking through exactly what I'm seeing because the implications for operators and investors are more significant than most of the coverage that I've been seeing is letting on. So let's start with a number that came out this week. I saw this uh in an analysis from Associated Builders and Contractors. This is regarding building material inflation. So they're saying that construction input prices increased by 6.2% between January and April of 2026. Energy commodities led the way in April, with steel and lumber also posting meaningful gains. But think about that. We're talking about 6.2% increase in the cost of building things in less than four months. And then hold that number alongside this new one, which is that new apartment starts are running at their lowest since 2016. So deliveries fell roughly, it was about 30% year over year in quarter one, uh, 2026. So the development pipeline is contracting, and it's contracting in a way that is not just a cyclical response to higher interest rates. It's being reinforced by a materials cost environment that makes new construction progressively harder to justify at any reasonable rent assumption. So when you put these two facts together, construction prices are shooting up in quarter one of 2026, along with uh new uh uh build starts at their lowest level since 2016, the result it's not it's not a soft housing market. Um it's it's a housing market where the structural ceiling on new supply is getting lower every single month. And so the story that you're really not hearing right now, and I don't see this narrative being talked about much, at least in mainstream media. The narrative that you do see in most real estate coverage is organized around interest rates, is really what you're seeing. So will the Fed cut? When will financing costs come down? When does the transaction market open reopen or pick back up? And they're legitimate questions, but in my opinion, they're focused on maybe not the wrong constraint, but they're only focused on one of the constraints. The financing cost conversation is about when buyers and sellers can transact and when it makes sense for them to do so. However, the other constraint is the construction cost conversation, is about how much new supply will actually come to market in the near future in 2027, 28, 29. And the answer to that second question about construction cost has significant implications for every operator who owns apartments today, regardless of what the Fed does. These are both very important constraints whose narratives need to be combined. So here's the mechanical reality. If you're a developer today trying to underwrite a ground-up multifamily project, right now, you know, I'm recording this end of May 2026, you're facing roughly 6% higher materials cost than you were entering the year. And construction starts uh financing that construction starts, uh, the financing of that assumes continued rate uncertainty and a rent environment where national multifamily rent growth came in around 1% to 2% in quarter one. I've even seen CBRE uh put the rent growth at 0.2% year over year. Now that's greater than zero. That's, you know, at least we're pulling out of the plateau or uh slight downshift that we experienced in 2025. But these are very small rent increases. So the math on new development really isn't working in most markets. That's the bottom line. And when it doesn't work for two to three years in a row, you're really developing a supply gap uh for the future, for then, you know, going into the end of the 2020s, that's gonna have a material effect across the board for all investors, even those who are not developing property. Um Arbor Research published data this week noting that vacancy may have already reached its cycle peak. That's good news for us. Uh, it's a notable statement for sure. And it it doesn't mean that rents are about to surge. That's not the point. But the demand picture is still being absorbed, particularly in the Sunbelt markets. Um, that took on a lot of supply in 22, 23, 24. But it does suggest that the handwind from new supply is turning, uh, that the absorption of these this you know big new supply post-COVID is being finally absorbed. And in fact, we are now on the back end of the absorption and looking at rent increases again, along with uh a declining vacancy rate. Now, the investors who are positioned to benefit from that turn are the ones who are holding quality assets throughout the whole period. And the question I want to focus on for the rest of this episode is how do you know if that's you? How do you know if you're in that position where you're the one holding quality assets uh through this period now of uncertain rates, high, high cost of construction, and we're looking at a looming supply, continued supply crisis, but a new one that's going to be caused by this lack of housing starts happening right now. So let's talk about the operational trap and mistaking stability for health. So one of the things I see consistently in multifamily portfolios, particularly in the, you know, anywhere from 20 to 100 unit range. So, in in which case, why that range is important is what we're really talking about is operators bigger than, you know, let's call them mom and pops with a couple of rental houses, but we're nowhere near the institutional guys. We're in that middle where you have professional real estate investors. You know, if you own 100, maybe even 200 units, uh, there's absolutely a level of sophistication more than just the accidental landlord or the mom and pop who owned three houses. Um, but you're not, but they don't have the institutional backing or um resources at their disposal. And more often than not, are doing this um not as a full-time gig. And so that's important. You know, we're talking about big property potentially, sophisticated um larger multifamily properties or portfolio of them, and along with that, the operational difficulties and the financing difficulties and all that, but it's being done probably by an operator who has another full-time job. And so one of the things I'm seeing consistently in this range of property um unit count within a portfolio is that operators interpret stable occupancy as a clean bill of health. So they say, I'm okay, I've got 93, 94% occupied. Um, most of the rents are being collected. Maybe collection rate by the end of the month is 95%. So nothing's obviously wrong. Uh, and then they move on to the next thing. Check. They've checked that box, everything looks good, clean bill of health, occupancy looks great, delinquency looks low. But what that framing misses is that stability and health are not the same thing. A property can be stably occupied while quietly deteriorating on the metrics that actually matter to the whole decision, that being expense trajectory, rent-to-market gap, debt service coverage ratio, DSCR, one of the most important metrics that most investors do not look at after they've closed a deal. And you need to be looking at DSCR under both current and projected refinancing terms. And the and finally, another metric is the break-even occupancy threshold relative to where you're actually operating. So let's give now a concrete example of how these things can diverge. So suppose you have a 20-unit building. Okay, occupancy is holding at 93%. That's pretty good. I think national average, like I said, CBRE's national vacancy average is somewhere around 6%. So it's a little lower. You're at 7% vacancy, but you know, you're holding average. There's nothing, you know, that's bank would consider that stabilized for sure. You maybe even underwrote it at 93%, probably more like 95%, but um, this is a pretty good number. So let's say you originated a loan in 2021 at 3.5% interest. Um, that's pretty low, but let's just let's go with that. Uh Fannie Mae was doing that. Uh, we refinanced a 22 init apartment building in 2022 at uh 3.97%. So this was possible. So rents are roughly flat in this case, let's assume. Modest concessions, but you're not hemorrhaging units. And on the monthly financial report from your property manager, everything looks fine from a collections perspective, from uh, you know, generally speaking, your maintenance and repairs um expenses look reasonable. But here's what that report, just a monthly cash flow statement, isn't telling you. What if your debt comes due in 18 months? And that's not just because you had a bridge loan, but what if what if maybe instead of coming due uh because there's a balloon, what if it's a refinance, you know, a commercial loan that had a sure 20-year AM, but was going to reprice after five years? What if that's what if that's coming up? What if that's next year, 18 months from now? So at current DSCR loan rates, which are on average about 6.75%, something like that, your annual debt service at the same loan amount roughly doubles. Think about that. If you were, if you refinanced, originated this loan in three at 3.5% about five years ago, your annual debt service is about to about double. Your rent growth over the past three years has not come close to offsetting that increase. Don't forget, we are just above uh above zero year over year rent growth on a national average. And so your operating expenses, insurance, property taxes, maintenance are meaningfully up from where they were at origination. We've all seen that, especially in the insurance realm. Property taxes, too, we've been getting hikes left and right that even our high quality um uh tax negotiators, um, they can't even come close to winning appeals right now. We're getting a lot of appeals denied. So when you run the breakeven occupancy at the new debt terms on this particular deal, going back to our example, this 20-unit building, uh it we it would not be unlikely at all that you would need a 91 or 92% occupancy just to cover obligations, meaning your breake-even occupancy is 91 or 92. So all of a sudden, that 93% occupancy you have doesn't look so good. Your margin is two or three occupancy points, which on a 20-unit property is like one unit, one or two units. So in a market that has some concession pressure and some leaseup competition still working through, there's not a lot of room there. You cannot drop on that occupancy. So this doesn't mean the assets in distress. Um, it doesn't mean necessarily it's even a problem, but it is fragile in a way that the monthly PL doesn't surface. And if you don't know that, you can't manage it. So here are three questions that every operator should be running right now. And I want to make this as practical as possible because I think the instinct when you hear analysis like this is to feel the weight of it without knowing what to actually do with it. So let me give you three specific questions to work through for every asset in your portfolio. So, question number one what is my break-even occupancy at the current market debt terms? Not at your existing loan rate, but at the rate you would face in a refinance today or in 12 to 24 months if your loan matures in that window. So run that number for every asset you own. And this should be, you should do this for even assets that you're not expecting to refi. You know, maybe you've got long-term debt uh locked in, maybe you just recently did it, and even though it reprices in five years, that's you know, 2026, you're looking at a reprice in 2031. It's not even under your horizon. Do it anyway. Um, because you never know what might happen. And and just knowing where your breake-even occupancy lands for all your properties is very important. So if your breake-even occupancy is above 88%, in my opinion, you need to understand exactly how much cushion you have and whether your current operating trends are building toward that threshold or away from it. Question number two: how is my NOI trending relative to my expense structure? So revenue often gets the most intention and metrics relating to revenue, that being occupancy and collections. But in an environment where insurance costs, property taxes, reassessments, and maintenance expenses are all climbing, maybe even concessions too, although that's more of a revenue side uh um uh PL item, the trajectory of your expense ratio matters as much as the trajectory of your gross rents. If your gross rents are flat or modestly positive, but expenses are up eight or 10%, which is not unheard of, I mean, it it I've I've been seeing insurance costs that can go up 5% on their own. And that all this means is that your NOI is compressing, even though the top line looks fine. And so understanding that compression is the first step to doing something about it. So, question number two, how is my NOI trending relative to my expense structure? So, this is looking at the trend of your expenses. And then question number three: which asset in my portfolio carries the most embedded fragility? So, this is not the same as asking which asset has the lowest occupancy or the large uh the lowest cash flow today. Well, fragility is different. Fragility is about the relationship between where you're operating and where you need to be operating to cover your obligations. It's that that break-even, those break-even metrics under current conditions and under some realistic stress scenarios. One is uh we're now seeing, and I think Wall Street is pricing, uh, the more likely scenario from the Fed this year, 2026, is at one price hike. And so um comparing where you're operating now to where you need to be in a uh where where your break-even is in a stressed environment, aka, you know, let's say the the Fed hikes um a quarter of a percent. That now relook in that context, look at your most fragile asset. And I think the one you find, the most fragile asset, might not be the most obvious one. So sometimes it's the one that looks fine until it doesn't. And when I say it looks fine, maybe that's because it's an easy asset. Maybe occupancy stays stable, rent collections are stable. There's never really problems that come out of this property from a maintenance perspective, from a CapEx perspective. Your property manager doesn't complain about it. Um, the time on market for leasing new units is pretty low. And so you just don't think about it very much, but you run a stress test on it and you realize it's the most fragile property in your entire portfolio. So running those three questions across your portfolio right now, before the refinancing conversation starts, before the lender is asking these questions, gives you optionality that you don't have if you were to wait. So I want to close with a thought on what I think the current moment actually represents. The conventional read on the 2026 multifamily market is that it's complicated and not what everyone expected six months ago. Rates are elevated, might even go up more. Uh, they have been going up more this past week. I'm recording this May 21st. Uh, and with uncertainty around the Middle East right now, uh, when you're I've been tracking five-year treasury, uh, it's been it's the highest it's been in the past year. And it's been going up uh almost every single day this past week. NOI growth has been modest. I think everyone's experienced that. We just discussed uh what kind of year over year rent growth averages are. They're barely above zero, where on the other hand, expenses have been tracking much closer to inflation, which is you know three, four, five, six percent. And there are markets with a real supply hangover from a post-COVID building glut. And all these things are true. But the forward-looking picture is different. Construction input prices being up 6.2%, starts are at a decade low. We're in a tariff environment where the surcharge on importing uh building material doesn't expire until at least late July and may be extended. And so a pipeline that even if developers tried to restart today, it takes 24 to 36 months to even deliver uh new apartments to the market. And so the operators who buy or hold quality assets through the noise of the next 12 to 18 months are buying into a window where competition for new supply is structurally constrained. And that's not a new narrative. Supply cycles in multifamily have always rewarded patients, but this one is being reinforced by a set of cost structures that weren't present in prior cycles. The question worth sitting with is not whether the supply picture will improve. It almost certainly will in 27 and 28 as the pipeline restarts and delivers. The question is whether your portfolio is in a position to hold into that improvement. And answering that question requires knowing your actual operating exposure, not just your headline occupancy and cash flow numbers. And that's that's the work. That's it right there. And in most cases, the operators who do that work, who study the trends of their portfolio, uh, and who do that work before the cycle in flex are the ones who look smart on the other side of it. Fun fact to close this episode, uh, the 30% year-of-year decline in multifamily delivery volume that we saw in quarter one, 2026 is the sharpest annual pullback in apartment completions since the aftermath of the 08 financial crisis, when new apartment starts effectively collapsed for four consecutive years and created the supply deficit that drove the dramatic rent appreciation of 2012 through 2015. With that said, history doesn't repeat itself exactly, but the structural mechanic is recognizable as we go into quarter two of 2026. Hope you got a lot out of this, and we will see you next Monday. Thank you for listening to Beyond IRR. This podcast is produced by Beacon Hill Property Advisors, where we focus on bringing clarity, structure, and rigor to real estate investment analysis. If you want to evaluate deals beyond headline metrics and better understand the mechanics driving performance, you can learn more about our tools and approach at bhpropertyadvisors.com. You can also connect with us directly for demonstrations, resources, and additional insights. Until next time, analyze deeply, allocate wisely, and always go beyond IRR