ETI Blog

Marcus & Millichap says apartment construction is down 50 percent from its peak and the next building cycle could be years away. For owners of older buildings, that changes the math on renovation

Marcus & Millichap's October construction outlook makes a blunt point. Apartment units under construction nationally are down 50 percent from their 2023 peak and still falling. Industrial construction is down 60 percent from its 2022 peak, and self-storage investment is down 32 percent.

The firm's argument is that building has gotten expensive enough that the next development cycle could be delayed by several years. If that is right, it matters for anyone who owns an older building.

Three Costs Holding Projects Back

Marcus & Millichap names three forces. Higher interest rates have raised financing costs and made projects harder to justify. Tariffs and shipping costs are keeping building material prices high. And labor costs are under pressure from immigration policy and from strong demand for workers on AI and data center projects.

The conclusion is that new projects will likely stay limited until rents rise enough to support the cost of building. Normally, construction responds to rising rents and eventually adds supply. This time, cost could interrupt that rhythm, extending the stretch of falling vacancy and rising rents longer than usual.

What It Looks Like in Chicago

Northmarq's Q2 report says Chicago's development pipeline has been shrinking and should continue to taper, which may help push vacancy below 5 percent in 2027. It also says Class B and Class C absorption has improved this year after a few weak periods, and that rents in those classes have gained ground the fastest.

The Chicago Fed heard a related story from Rogers Park owners in February. Most of the owners surveyed expected to make major investments, renovations, or repairs to their buildings in 2026, and about half wanted to acquire more. But the same owners described a hard cost picture: insurance, taxes, and labor rising faster than rents, skilled workers who know older buildings getting scarce and expensive, and refinancing from rates as low as 3 percent to 6 percent or more.

Costs for the work itself are moving, too. Turner & Townsend's Chicago market overview, which focuses on office fit-outs, said bid prices were expected to stay flat in the first half of 2026 because of intense competition. But 27 percent of respondents said tariffs on copper and steel conduit were driving up electrical costs, and plumbing materials were rising faster than normal. Mechanical and electrical trades were strained by data center demand. Residential work is different from office work, but the same trades and materials are involved.

The Case for Renovating, and Its Limits

The logic for owners is simple. If new competing buildings stay scarce, an existing building with updated systems and a solid roof has a longer period in which it competes mainly with other older buildings. Marcus & Millichap frames the opportunity as a longer runway for rent growth. CRE Daily's coverage of the report notes that some large investors, including Hines, are already leaning toward buying existing properties.

The limits are just as real. Renovation faces the same material, labor, and financing pressures as new construction. Older buildings are harder to insure, and insurers often attach repair conditions such as roof replacement. And the Marcus & Millichap view is a national forecast. Land costs, local policy, and neighborhood demand will decide which buildings benefit. Nothing here guarantees rent growth for a specific building.

Questions to Ask Before Spending

Owners weighing a renovation can start with a few practical questions. Which systems are most likely to fail first: roof, plumbing, electrical, or heating? Which repairs can wait a year, and which cannot? Can the work be phased so tenants stay in place? And when bids come in, are material allowances shown separately, so tariff swings on items like conduit and plumbing are visible rather than buried in a lump sum?

A contractor's walk through the building before the budget is set is one way to answer those questions. For owners of older multifamily buildings, it can turn a vague repair list into a sorted, priced plan.

Planning to Renovate an Older Building?

A walk through the building can sort repairs by urgency, price the major systems, and show what can be phased around tenants.

If you own or are buying an older apartment building in Chicago or the suburbs, we would be glad to walk it with you.

If you are planning to renovate an older building, walk it with us. Request a walk