By Bill Sherbert, COO of The Sherbert Group, bsherbert@sherbertgroup.com
The multifamily housing sector in North Carolina has been a cornerstone of the state’s response to rapid population growth and housing demand, particularly in high-growth urban centers like Charlotte and Raleigh. Over the past four years (2021–2024), the sector has faced a confluence of economic pressures: rising apartment rental prices, escalating construction costs, increasing interest rates, and the looming impact of new tariffs. While rising rents have partially offset the financial strain of higher costs and borrowing rates, the moderation of rent growth in 2023–2024, combined with persistent construction cost increases and potential tariff-driven inflation, has made financing new multifamily developments increasingly difficult. This article explores these dynamics, their impact on project feasibility, and the challenges developers face in securing financing for new multifamily housing in North Carolina.
The Backdrop: Four Years of Economic Shifts
Rising Rents: A Double-Edged Sword
From 2021 to 2024, apartment rental prices in North Carolina surged, driven by strong demand from population growth (165,000 new residents from July 2023 to July 2024) and a tight housing market. In 2021, urban areas like Charlotte and Raleigh saw double-digit rent increases, with median 1-bedroom rents rising from approximately $1,200–$1,400 to $1,400–$1,800 by 2022. Nationally, rents jumped 11.3% in 2021, and North Carolina’s high-demand markets followed suit. By 2023, median rents in Charlotte reached $1,950, though growth slowed to a modest 2–5% annually, and Raleigh saw a 5.6% decline in 2024 to $1,400–$1,500 due to oversupply. Statewide, rents increased 21.5% from 2019 to 2022, outpacing inflation (15.5%).
These rent increases initially bolstered developer confidence, as higher revenues supported the financial feasibility of new projects. However, rent growth moderated in 2023–2024 due to a surge in multifamily supply (6,116 units delivered in Charlotte in the first half of 2024 alone) and higher vacancy rates (6.9% nationally in March 2025). CBRE forecasts modest rent growth of 2.6% in 2025, below the pre-pandemic average of 2.7%, signaling limited revenue upside for developers.
Escalating Construction Costs
Construction costs for multifamily housing in North Carolina have risen significantly since 2019, with a 33% increase through 2023, outpacing general inflation (22.5%). The median total development cost (TDC) per unit for Low-Income Housing Tax Credit (LIHTC) projects reached $250,000 in 2023. Nationally, construction costs in 2023 were 31% higher than pre-pandemic levels, driven by spikes in materials like lumber and steel, labor shortages, and supply chain disruptions.
In North Carolina, these cost pressures are exacerbated by high land prices in urban markets like Charlotte’s South End and Raleigh’s Downtown, where demand for prime locations drives up acquisition costs. The North Carolina Housing Finance Agency (NCHFA) notes that even affordable LIHTC projects, designed to be cost-efficient, face significant cost hurdles, requiring additional subsidies to remain viable.
Rising Interest Rates
Interest rates have been a major headwind for multifamily development. The Federal Reserve raised the federal funds rate from 0.00–0.25% in early 2022 to 5.25–5.50% by July 2023, pushing mortgage and construction loan rates higher. By late 2023, 30-year mortgage rates peaked at 7.79%, and multifamily loan rates ranged from 5% to 11% depending on property quality and borrower strength. These higher borrowing costs have increased debt service requirements, squeezing project budgets.
In North Carolina, developers relying on floating-rate loans—popular during the low-rate environment of 2021—face challenges as rates have risen, increasing refinancing risks. Newmark’s analysis indicates that 36% of securitized multifamily loans maturing through 2025 have debt service coverage ratios (DSCR) of 1.25x, making refinancing difficult in a high-rate environment.
New Tariffs: A Looming Threat
Proposed tariffs on imports add uncertainty to construction costs. Tariffs on materials like steel and aluminum could drive up prices, with ripple effects on multifamily development. CBRE notes that higher tariffs may increase retail prices and construction costs, potentially impacting project budgets in 2025. In North Carolina, where developers already face a 33% cost increase since 2019, tariff-driven inflation could further erode project feasibility, especially for market-rate projects with tight margins.
The Financing Challenge: Why New Developments Are Stalling
The interplay of moderating rent growth, rising construction costs, high interest rates, and potential tariff-driven cost increases has made financing new multifamily developments in North Carolina increasingly difficult. Several key factors highlight the challenges:
- Eroding Project Feasibility
The economic feasibility of multifamily projects hinges on balancing development costs, financing expenses, and rental income. In 2021–2022, skyrocketing rents offset rising costs and low interest rates, making projects attractive. However, as rent growth slowed in 2023–2024 (e.g., Charlotte’s $5 rent increase from December 2023 to December 2024), the revenue potential no longer justifies the 33% cost increase and higher debt service costs. A post on X noted that “the math no longer works” for many projects, with economic infeasibility being the top reason for construction delays.
For example, a 100-unit market-rate project in Charlotte with a TDC of $325,000 per unit costs $32.5 million. At a 7% interest rate on a $25 million loan, annual debt service is approximately $2.1 million. With median rents of $1,950/month ($23,400/year per unit), a 100-unit property generates $2.34 million annually, leaving little room for operating expenses (which are also increasing 9.3% per Yardi Matrix) or profit after debt service. In contrast, LIHTC projects benefit from tax credits and subsidies, but market-rate developments rely solely on rental income, making them more vulnerable to cost and rate pressures.
“While the math isn’t as favorable—due to escalating construction costs and slower rent growth—it’s challenged us to innovate. We’re exploring new ways to finance projects and reimagining both our designs and our structures to adapt. “
- Fred Dodson, COO/EVP of DreamKey Partners, Inc., Charlotte, NC
- Tightened Lending Standards
Lenders have become more cautious due to higher interest rates and softening market fundamentals. The NMHC reported worsening conditions for debt and equity financing throughout 2023, with 92% of firms citing delays in construction starts due to financing unavailability. In North Carolina, banks are tightening underwriting standards, requiring higher DSCRs (e.g., 1.25x or above) and lower loan-to-value ratios, which limits borrowing capacity. Floating-rate loans, used by many developers during the low-rate period, now pose refinancing risks as rates remain elevated.
Fannie Mae and Freddie Mac, key financiers of multifamily projects, are introducing stricter tenant protections in 2025, potentially increasing compliance costs and affecting loan terms. The potential privatization of these agencies could further disrupt financing availability, particularly for affordable housing projects reliant on their backing.
“With market fundamentals softening and interest rates still high, we’re seeing tightening underwriting standards on projects. Higher DSCR requirements and conservative loan-to-value ratios are more and more common.”
- Aaron Mayer, Director of Sherbert Consulting, Inc.
- Supply Surge and Market Saturation
North Carolina’s multifamily construction boom—7,011 multifamily permits in Q2 2024, representing 27.3% of all housing units—has led to oversupply in markets like Charlotte and Raleigh. Charlotte delivered 6,116 units in the first half of 2024, with 34,543 units under construction, contributing to a cooling rental market. CBRE notes that Charlotte and Raleigh are among six U.S. markets peaking in construction deliveries in 2025, which will keep vacancy rates elevated (4.9% projected in 2025) and suppress rent growth. This oversupply reduces pricing power for landlords, making it harder to justify new projects with high upfront costs.
“The supply/demand equation has shifted slightly towards tenants, resulting in stagnating rents. For developers, it makes it a tougher sell on new projects. It is pushing developers to focus on submarkets with untapped demand.”
- Michael Bull, President, Bull Realty
- Tariff-Driven Cost Uncertainty
New tariffs on construction materials could exacerbate cost pressures. The Carolina Journal highlights that trade restrictions may force developers to absorb higher costs, as passing them onto renters is challenging in a market with moderating rent growth. For instance, a 10% tariff on steel could increase construction costs by 1–2%, adding $3,000–$6,500 per unit to a $325,000 TDC. With rent growth projected at 2.6–3.1% in 2025, developers cannot easily offset these costs, further straining project budgets.
“Potential tariffs on products manufactured in other countries, or with parts from other countries, are forcing subcontractors to procure these products well in advance to help mitigate cost impacts to the project. The costs for storage of these materials, while typically less than the tariff amount, is forcing developers to allocate additional funds up front with additional contingency dollars, potentially affecting the feasibility of the project.”
-Mike Flores, Regional Director, Fortune-Johnson General Contractors
Strategies to Navigate the Financing Landscape
Despite these challenges, developers are exploring strategies to improve the feasibility of multifamily projects in North Carolina:
- Adaptive Reuse: Converting vacant office buildings into apartments, as seen in Winston-Salem (40% downtown office vacancy), reduces land and construction costs. Municipal support through tax credits, tax abatements or zoning adjustments is critical for these projects.
- Public-Private Partnerships: Collaborations with local governments can unlock subsidies, grants, or LIHTC allocations, particularly for mixed-income developments. The NCHFA has increased financial resources for LIHTC projects to counter cost increases.
- Cost Optimization: Developers are prioritizing efficient designs and value-oriented housing to lower TDC. The key is well-planned projects that factor in design savings from day one, as well as looking at alternative construction materials, sources and methods. Factoring in long-term ownership costs, such as through energy efficient designs is also critical.
- Alternative Financing: “Rescue capital” funds, like ACRE’s $400 million fund, provide preferred equity to bridge financing gaps for struggling projects. HUD-insured loans and USDA-backed financing offer options for experienced developers, though they require significant expertise.
- Waiting for Rate Relief: Some developers are delaying projects until interest rates stabilize or decline, though CBRE and Forbes predict rates will remain elevated through 2026.
Looking Ahead: A Cautious Outlook for 2025
The multifamily housing sector in North Carolina faces a pivotal moment in 2025. Strong demand from population growth and high homeownership costs (mortgage payments 35% higher than rents) will continue to drive renter interest, but the financial hurdles of new development are formidable. Moderating rent growth (2.6–3.1% projected) cannot fully offset the 33% construction cost increase since 2019, high interest rates (5–11% for multifamily loans), and potential tariff-driven cost spikes. CBRE predicts multifamily construction starts will drop 30% below pre-pandemic averages by mid-2025, signaling a slowdown in new projects.
For developers, securing financing requires navigating tighter lending standards, leveraging subsidies, and optimizing project designs. The Carolina Journal emphasizes the need for public-private collaboration to address supply constraints and rising costs, such as through zoning reforms or adaptive reuse incentives. Without innovative solutions, the imbalance between housing demand and supply could exacerbate affordability challenges, with industry insiders predicting rent increases of 10–15% if construction stalls further.
North Carolina’s multifamily market remains a land of opportunity, but developers must tread carefully. By understanding the interplay of rents, costs, interest rates, and tariffs, and by pursuing strategic financing and development approaches, stakeholders can navigate this complex landscape and contribute to meeting the state’s pressing housing needs.