Keeping an Eye on Multifamily Growth

It is really no secret that the multifamily sector is booming. Consider that the overall vacancy rate for rental housing in the United States fell to 6.4% in the fourth quarter of 2019. This represents the lowest vacancy rate since the second quarter of 1985, according to the Census Bureau. New construction of apartment complexes and condos rose 29.8 percent in December to their highest level since 1986. And, approximately 340,000 new apartments are expected to be built in 2020.

 

Several factors are driving this significant growth in multifamily. First, an abundance of both equity and debt capital will continue to drive multifamily development. The U.S. is still seen as a safe haven, so capital continues to pour in from investors abroad. Many domestic investors see multifamily as the asset class best positioned to whether a potential downturn and are over-weighting their allocations into multifamily as a result. Finally, long-term interest rates have fallen and appear stable in the near term. Given the now widening gap between US Treasury rates and capitalization rates, continued strong demand for US assets and limited investment alternatives abroad, there is growing sentiment that cap rates might actually contract in 2020.

 
 

 

Approximately 340,000 apartments are expected to be built this year.

Financing remains readily available while rates remain historically low. The total debt market for multifamily assets is expected to equal approximately $400 billion in 2020. Fannie Mae and Freddie Mac should easily reach their combined designated caps of $160 billion in new loans, even with a stricter focus on affordable housing. National, regional and local banks should continue to provide significant liquidity to the market with very competitive terms. Life companies are expected to remain a steady source for low-leverage, stabilized assets. And, non-regulated debt funds should pick up market share this year.

 

Demographic shifts and economic realities should also drive multifamily growth in 2020. Millennials make up the biggest renter demographic at 29 percent, according to Fannie Mae research. Although media coverage has promoted the idea that this group prefers to rent for lifestyle reasons, recent research suggests otherwise. A survey by Apartment List found that 9 out of 10 Millennials would like to buy a home but are hampered by cost. A whopping 72 percent said they simply can’t afford it. This aligns with a parallel finding by realtor.com, showing a “demand surplus” across much of the nation’s for-sale inventory priced below the $350,000 level, a prime price range for potential first-time homebuyers.

Contributing to the issue is the fact that Millennials follow jobs – and most of the job growth has been concentrated in large metropolitan areas where home prices are typically much higher than average. A Bloomberg analysis found that one-third of the U.S. economy is concentrated in 1 percent of the nation’s counties — just 31 in all — clustered around large coastal cities such as Los Angeles, New York and Washington D.C. The supply of affordable homes is not likely to change anytime soon in these areas given the economics of development, including high land costs, high regulatory fees, long approval processes and development restrictions. So, whether it is by choice or by circumstances, the rental pool seems stable.

 

As always, there are some headwinds to consider in the year ahead. New development is expected to exceed anticipated demand for the first time in years. Wage growth does not seem to be keeping pace with rental price increases and certainly, rent control measures could significantly impact investment – especially in the value-add segment of the market. But given the convergence of abundant capital, strong demand and positive demographic trends, including in-migration, tenant preferences for greater mobility, lifestyle choices and an aging population, the multifamily segment market seems well positioned for continued growth and prosperity.

 

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