New Hampshire’s multifamily market is showing distinct signs of a split personality.

On the one hand, the vacancy rate for apartments remains at historic lows amid extraordinarily strong demand that’s recently driven rental prices relentlessly upward.

Sounds like a good time to build new multifamily facilities amid such favorable conditions, right?

Not necessarily, due to higher interest rates and skyrocketing construction costs that often financially cancel out those favorable conditions, industry experts say.

The bottom line: even though many multifamily projects are in the planning pipeline across the state, most aren’t getting built as a result of financial headwinds working against many proposals.

“It’s getting really hard to pencil in these projects,” said William Norton, president of Norton Asset Management in Concord. “You have to get pretty hefty rents to cover all the costs of new construction. But rents aren’t keeping up with those costs.”

Rents on the Rise

Rents across New Hampshire are definitely rising.

According to Zillow, average rental rates for all bedroom apartments in Manchester, the state’s largest city, hit $2,095 in May, up 4.72 percent from the previous year.

Those numbers are roughly in line with recent Apartments.com data showing rental prices for one-bedroom apartments in the Granite State recently rising by about 3.2 percent, to $1,828. Meanwhile, three-bedroom apartments are now fetching upwards of $2,630, according to the rental listing site’s data.

Those prices are being driven by historically low vacancy rates of about 4 percent, according to the most recent Federal Reserve data.

And, ultimately, it all ties back to a lack of new housing construction, coupled with increasing demand, that’s pushing up both rental rates and home purchase prices across the state, officials say.

“Everyone sees this strong demand – and builders want to meet that demand,” said Robert Dapice, chief executive of the New Hampshire Housing Finance Authority, also known as New Hampshire Housing. “But the headwinds [to build] are stiffer in terms of financing and construction.”

To be sure, the top problem facing multifamily developers remains fierce opposition to projects by local officials, who have long thrown up numerous zoning obstacles to prevent new developments from getting off the ground, Dapice and others stress.

Finding Loans Is Hard

But even if developers get necessary local zoning and building approvals, multifamily developers still face daunting financial challenges due to higher interest rates and construction prices that have risen 50 percent or more in recent years.

“The financing has gotten harder,” said Dapice, whose agency helps fund affordable-housing projects via federal tax credits and tax-exempt bonds. “The question is finding the funding – and helping people get that funding. In the past four or five years, we’ve seen a significant increase in interest from developers [looking for financial assistance].”

There’s indeed multifamily construction under way in New Hampshire, especially in larger metro markets, such as those in the Manchester, Nashua and Portsmouth areas.

Such projects are expected to add a few thousand more units to the state’s overall housing stock.

But Norton said many of those new projects were financially lined up before recent Fed interest rate hikes and/or before recent hyper-inflation drove up construction prices.

Combined with market anxieties over global trade wars and the state of the U.S. economy in general, many developers simply can’t find the financing they need to get projects off the ground, Norton said.

$300K Per New Apartment

Meanwhile, rents seem to be plateauing in some areas of the state, suggesting that renters are starting to balk at ever-higher lease prices, Norton said.

Norton noted that if one adds up the costs of land, the extensive permitting process, construction materials and labor, the average cost per new housing unit now comes out to about $300,000 in central and southern New Hampshire.

“That’s not exactly an affordable number,” said Norton.

Dan Scanlon, a senior associate at Colliers International, agrees that rent prices simply haven’t kept up with other housing costs in general, particularly interest-rate costs.

The problem also applies to already existing apartment buildings, not just new construction projects.

He noted that many existing apartment buildings that were purchased five years ago, when interest rates were in the 3 percent range, are now seeing loan resets at 6.5 percent to 7 percent.

“I’m a little bit concerned,” Scanlon said. “I don’t know if rents have gone up to [match] the doubling of interest rates.”

Worries of Luxury ‘Saturation’

Not that the multifamily sector is paralyzed by various financial headwinds.

A number of higher-end apartment buildings have recently been constructed, Scanlon noted.

“We’ve seen a lot of activity,” he said. “The multifamily market has been busy.”

But Scanlon questioned how many more luxury rental units the state’s market can absorb.

“I’m starting to wonder about the saturation level,’ he said.

“I don’t know where the saturation point is. But you have to wonder. And with higher interest rates and construction prices, I think it’s going to be challenging moving forward.”

Scanlon said the financing market for multifamily properties is definitely in a strange space.

Demand may be high for affordable multifamily units, but financing can still be tricky to obtain, he said.

New Hampshire Housing’s Dapice said multifamily developers are definitely getting mixed signals of late.

“They’re doing as much as possible, but there’s an awful lot of uncertainty out there.”