For some time experts have predicted the multifamily market’s furious growth will slow. But, the truth is, that still hasn’t happened in most areas.
Last year, most prognosticators for the multifamily sector predicted a record number of new units would cause rents to moderate and vacancies to increase. Sales of multifamily properties would dip below the record high levels of 2015, and price growth would slow down. But that’s not what happened.
Pointing out that a slowing has been predicted for some time, writing for CoStar.com, author Mark Heschmeyer says he thinks “one can understand if market experts are a bit hesitant to hazard a prediction”. Prognoticators said things would slow after 2015’s record. Heschmeyer notes “from a predictive standpoint, it just makes sense, after all moderation has to set in sooner or later, right”?
But It Hasn’t Happened
Interviewed for Herschmeyer’s article, John Affleck, apartment research strategist for CoStar Group, points out that:
Nonetheless, the forces that have produced the best multifamily market in recent memory remain largely in place,” said . In other words, the recent remarkable run in apartment demand and property values could just as well keep rolling.
Indeed, says Herschmeyer, adding:
The multifamily market continues to outperform other property sectors and has the lowest vacancy rate of all the major property types at 5.2% (as of the end of third quarter 2016.) In addition, also as of the third quarter, average rental rates experienced a 3.9% increase.
The Question Is: Will It?
Affleck continues by saying “the sector’s record of steady rent growth and high occupancy with low volatility continue to make apartment properties an ideal defensive asset as the economic cycle extends into a seventh year”. But Affleck sounds a note of caution as well:
The unprecedented propensity to rent, even among the most affluent, represents the chief risk to the cycle. Historically low interest rates and homeownership costs that have risen more slowly than rents have already coaxed some renters toward owning.
Despite this, though, all indicators are that the segment is still healthy. Herschmeyer quotes CoStar numbers that are saying:
Although the national vacancy rate for multifamily property is projected to increase to 5.6% in 2017 and to 5.7% in 2018, even at the expected peak that is still below the 15-year average vacancy rate of 6.1%. Meanwhile rental rate growth is expected to moderate over the next two years to 2.3% in 2017 and 2.2% in 2018, but still above the 15-year average growth rate of 1.9%.
Freddie Mac Is Bullish Too
Herschmeyer notes that “several economic and demographic factors are driving demand, according to Freddie Mac. Renter households are poised to grow in every generational cohort due to a range of economic and demographic factors. Positive job growth and a stable economy should help more Millennials form households and enter the market”.
According to Freddie Mac’s David Brickman, executive vice president and head of multifamily business:
We believe the fundamentals the market tracks, including values and rents, appear likely to continue growing, albeit at a more moderate pace.
Properties are being priced fairly in most markets. When we take these factors together with today’s generally strong economy, we project annual new multifamily originations to keep expanding, albeit at a more moderate pace.
Summing It All Up
The experts think the explosive multifamily market may finally be slowing down. Or maybe not. If you have multifamily investments or are looking at this segment, you owe it to yourself to have an expert in your corner. There are just too many moving pieces to risk doing everything yourself.
The team at Pacwest Commercial Real Estate dedicates themselves to staying on top of everything; it’s part of their commitment to their clients. Give them a call today at 541-912-6583! You’ll be glad you did.