Many of the cranes crowding skylines from Phoenix to Denver and Dallas will soon come down. They are likely to stay down for a long time.

The number of new apartments starting development has fallen dramatically this year, a consequence of higher interest rates, declining rents and what in some places looks like overbuilding.

Apartment building starts fell to a seasonally adjusted annual rate of 334,000 units in August, marking a 41% decline from the pace seen the same month a year prior, according to the Census Bureau. An annual decline of this magnitude has happened only one other time since the subprime housing crisis, real-estate data firm Bright MLS said.

“We expect to see about two years of greatly reduced building,” said Greg Willett, first vice president at Institutional Property Advisors, a real estate advisory company.

Falling starts come on the heels of record apartment construction across the U.S. More rental buildings are expected to open this year and next than at any time since the 1980s, according to some forecasts.

That crush of new rental supply is driving up apartment vacancies and causing rent growth to flatten or even turn negative in some places.

Now, many apartment builders are hitting pause. They won’t keep laying bricks if expected profits can’t beat safer investments or if too many other buildings are already coming on line.

The cost and scarcity of construction financing is the chief reason builders say they can’t make new projects pencil out. Banks, which have increased reserves to support troubled property loans they already hold, are lending far less often.

When they do lend, they are tightening standards, and the rates they offer are much steeper. A construction loan that once came with about 4% interest now charges close to 8%, said Lauren Brockman, an apartment developer in Denver who builds complexes with between 140 and 350 units.

Developers have tried to compensate by raising more equity from investors. But convincing investors to jump into construction right now is a tough sell, in part because they can’t predict how much a building will be worth when it is finished, said Toby Bozzuto, chief executive of apartment builder the Bozzuto Group.

The relative lack of building sales this year means there aren’t enough transactions to make solid comparisons or arrive on reliable values, Bozzuto said.

Builders cited materials costs and rising expenses, such as insurance, as other reasons that planning out new projects is becoming more difficult this year.

Multifamily starts are falling most in places that saw some of the biggest run-ups in new construction during the pandemic. In Denver, where more than 30,000 apartments are already under way, starts for new ones fell by 66% in the second quarter this year, when compared with the average of starts of all other quarters since 2021, according to Institutional Property Advisors.

Asking rents for apartments in Denver have remained close to flat in 2023, according to several metrics. That is making builders less eager to put stakes in the ground.

“Everybody’s leery that if I build today, do I get enough rent inflation between now and when I finish it?” said Brockman.

In the Dallas metro area, where new construction has also tumbled, developers that expanded to untested neighborhoods are pulling back. “The primary example is [far] on the north side where, frankly, you’re getting close to Oklahoma at that point,” Willet said.

Construction sector job openings and hiring have fallen in recent months, according to the Bureau of Labor Statistics. As starts continue to decline, builders and analysts say they expect to see construction layoffs increase too.

The future for apartment building remains closely tied to what happens with interest rates. Should rates stay steady for a few quarters, or even go down, developers and their lenders might start to feel comfortable enough to push forward with stalled plans.

The still rising price of for-sale homes is a force in the apartment builder’s favor, one that analysts expect to persist for years to come.

“That is going to push demand for housing toward rentals,” said Willett.

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