
The Impact of Rising Interest Rates on Multi-Family Construction
With the federal funds rate hitting 4.58% in December 2024 and mortgage rates nearly doubling between 2021 and 2024, the rising cost of borrowing has cooled new home sales and dampened investor enthusiasm for Real Estate Investment Trusts (REITs).
In this blog, we’ll look at how these shifts are reshaping the landscape for developers, real estate investors, and construction professionals alike.
Understanding the Current Market
“The current economic landscape presents both challenges and opportunities in the multifamily construction space,” notes Robert E. Yoakam, President & CEO of Rockford Construction. “Rising interest rates have created some headwinds, but the fundamental need for quality multifamily housing remains strong, particularly in underserved markets.”
The multifamily construction sector is experiencing a significant transformation as it adapts to changing economic conditions. According to the National Multifamily Housing Council, there has been a 15.7% year-over-year decline in U.S. residential building activity, primarily driven by rising interest rates and market uncertainty.
Data from the Census Bureau indicates a 37.1% decrease in multifamily starts (5+ units in structure) between Q2 2023 and Q2 2024.
This makes it crucial for those operating in the multifamily space to transform and adapt significantly to changing economic conditions.
Dennis Sweeney, President of Construction at Rockford Construction, emphasizes the importance of strategic planning in this environment: “Despite the challenges posed by higher interest rates, we’re seeing continued demand for well-planned, thoughtfully designed multifamily projects that meet community needs. Success in today’s multifamily market requires careful attention to both construction costs and long-term value creation.”


The Effects of Rising Interest Rates
Increased Borrowing Costs
The effects of rising interest rates extend beyond immediate construction costs, affecting the entire development ecosystem. Higher borrowing costs have led to:
- More stringent lending requirements and lower loan-to-value ratios requiring developers to bring more equity to the table for new projects
- A shift in real estate investment strategies, with many developers focusing on value-add opportunities rather than ground-up construction
- Increased emphasis on project efficiency and cost control measures to maintain profitability
“In this higher-rate environment, successful projects require more careful planning and execution than ever before,” explains Yoakam. “At Rockford Construction, we’re helping our clients navigate these challenges by leveraging our expertise in HUD-insured projects and innovative financing solutions.”
Industry Challenges
Record-High Debt Levels
The multifamily sector also faces significant challenges with debt management, particularly as a substantial portion of existing debt approaches maturity. This situation requires developers and investors to:
- Carefully evaluate refinancing options and timing
- Consider alternative financing structures
- Maintain strong relationships with lending partners
- Focus on operational efficiency to support debt service coverage


Market Dynamics
Supply/Demand Imbalance
Despite current market challenges, the fundamental demand for multifamily housing remains robust. The National Apartment Association’s projection of a need for 4.3 million new apartments by 2035 underscores the long-term opportunity in this sector.
“While the current economic environment presents certain challenges, the underlying demand for quality multifamily housing continues to grow,” notes Sweeney. “This is especially true in Central Ohio, where we expect a surge in population growth and job opportunities, spurred by the arrival of big tech data centers and chip manufacturing plants, creating a significant demand for housing.”
The Role of Interest Rates in Multifamily Construction
How Interest Rates Affect Construction Costs
Rising interest rates create a ripple effect throughout the construction process, impacting:
- Material procurement and storage costs
- Labor pricing and availability
- Project timeline management
- Overall project feasibility and return projections


Navigating the Shifting Landscape
Strategies for Success
In today’s market, successful multifamily development requires a comprehensive approach that includes:
- Thorough market analysis and site selection
- Innovative design and construction methods to optimize costs
- Strong relationships with financial partners and contractors
- Focus on sustainable and energy-efficient building practices
The Impact on Consumers
The effects of rising interest rates extend beyond the construction industry to impact end-users in several ways:
Higher rental rates as developers pass on increased costs
Shifting demographics as would-be homebuyers remain in the rental market
Growing demand for amenity-rich communities that justify higher rents
Increased focus on value-oriented housing solutions
“We’re seeing a clear shift in consumer preferences and needs,” explains Yoakam. “This has led us to adapt our approach to multifamily development, ensuring we deliver projects that not only meet current market demands but also provide long-term value for our clients and their residents.”


Student Housing Market
A Niche Segment of the Multifamily Industry
The student housing sector has emerged as a resilient and dynamic segment within the multifamily construction industry, demonstrating unique characteristics that set it apart from traditional multifamily developments.
Despite rising interest rates and construction costs, demand for purpose-built student housing remains robust, driven by steady enrollment trends and evolving student expectations.
“Student housing represents a compelling opportunity in today’s market,” notes Yoakam. “Today’s students expect more than just a place to sleep – they’re looking for communities that support their academic success while providing the amenities and social spaces that enhance their college experience.”
The student housing sector presents several key advantages:
- Predictable demand cycles aligned with academic calendars
- Higher rent per square foot compared to traditional multifamily properties
- Opportunity for premium pricing through amenity-rich developments
- Strong potential for public-private partnerships with educational institutions
- Resilience during economic downturns due to the countercyclical nature of higher education
Success in student housing development requires careful attention to several crucial factors:
- Strategic site selection with emphasis on proximity to campus
- Understanding of specific university enrollment trends and housing policies
- Design that balances privacy with community-building spaces
- Integration of technology and study-focused amenities
- Efficient unit layouts that maximize rentable square footage
Senior Housing Market
Meeting the Evolving Needs of Active Adults
The aging of America’s population presents one of the most significant opportunities in the multifamily construction sector.
With Americans living longer, healthier, and more active lives, the demand for sophisticated senior housing solutions continues to grow, creating compelling opportunities for developers and construction partners.
Dennis Sweeney emphasizes the importance of understanding this demographic: “Seniors are redefining retirement living. They’re looking for communities that support their active lifestyles while providing the flexibility to age in place. This requires thoughtful design, quality construction, and attention to both current and future needs.”
Key trends driving the senior housing market include:
- There is a growing demand for active adult communities that emphasize lifestyle and wellness
- Increased focus on technology integration for both convenience and healthcare monitoring
- Rising preference for urban and suburban locations with easy access to amenities
- Need for flexible designs that accommodate aging in place
- Emphasis on community spaces that foster social connection and engagement
Successful senior housing developments typically incorporate:
- Universal design principles that enhance accessibility without sacrificing aesthetics
- Smart home technology for safety and convenience
- Energy-efficient systems to control operating costs
- A mix of private and community spaces to promote social interaction
- Healthcare-ready infrastructure for future service integration
“The senior housing market represents a long-term opportunity for savvy multifamily investors and construction partners,” adds Yoakam. “Success in this sector requires not just construction expertise, but a deep understanding of how seniors want to live and the services they’ll need as they age.”


Conclusion
While rising interest rates have created challenges for the multifamily construction sector, they have also driven innovation and efficiency in project planning and execution.
The fundamental need for quality multifamily housing remains strong, particularly in markets with solid demographic and economic fundamentals.
Working with experienced partners becomes increasingly important as the real estate industry evolves.
Rockford Construction’s extensive experience in HUD-insured projects, low-income family housing, and multifamily residential construction positions us ideally to help clients navigate these challenges and capitalize on opportunities in the current market.
Whether planning a new development, considering a renovation project, or exploring financing options for your multifamily construction needs, Rockford Construction is here to help.
Contact our team today to learn how we can support your project’s success in this dynamic market environment.
To discuss your multifamily construction and commercial real estate projects or to learn more about our services, please contact Rockford Construction at rockfordconstruction.net.