2018 Multifamily Outlook

2017 was a strong year for the multifamily industry. The market performed well with favorable demographics and provided a healthy investment environment. Despite a very high number of new units added to the market, occupancy rates stayed high as rental demand continued growth throughout the year. In addition, rents and property values had a generally-upward trend across the country, less certain cities and submarkets that experienced some challenges.

Will multifamily momentum carry over to 2018? While there are some mixed opinions, a number of industry indicators and pundits are confident the multifamily sector will remain strong in the new year. 

According to Doug Ressler,  director of business intelligence for commercial real estate data firm Yardi Matrix, new construction competition carrying over from 2017 could finally put a dent in occupancy rates.  “Occupancy will begin to have a slight downward trend in 2018 as new supply is introduced,” says Ressler. In 2017, occupancy rates averaged 95.6 percent. Based on Yardi Matrix data projections, 2018 will maintain a similar average of 95.4 percent.

That said, Ressler also noted the possibility of developers slowing the pace of new builds as the year progresses, which would improve the outlook for 2019. With fewer developments coming to market, 2019 would forecast some strong occupancy rates that could encourage property managers to increase rents. “We see national rent growth continue its positive climb in 2018,” says Ressler. in 2017, rents averaged an increase of 2.4 percent. Yardi Matrix projects 2018 rents to grow by 2.9 percent.

Industry professionals could see a change in target markets as the industry shifts into the new year. For example, some submarkets experienced strong growth as we rounded out 2017. So if that growth remains consistent this year, suburban/satellite cities benefitting from “demand overflow” could become popular investment environments.

All quotes and figures have been digested from Yardi Matrix and NREI Daily.  

 

 

Federal Reserve Raise Interest Rates

As many real estate professionals expected, the Federal Reserve increased interest rates to a range between 1.25 and 1.5 percent. This is the third increase of the year with the last one coming in June.

The chief economist at Jones Lang LaSalle (JLL), Ryan Severino, expressed his minimal concern by stating, “We have been hiking rates for the last two years with no discernable impact on commercial real estate. That is because the economy continued to grow quickly enough over the last two years to support real estate even in the face of rising rates.”

That is not to say Severino doesn’t have his reservations. He highlighted the fact that rates increasing too quickly could stall economic growth and do considerable damage to the commercial real estate sector. In addition, as interest rates continue to rise, the cap rate spreads will continue to compress. Having said that, industry pundits believe the economy is strong enough to absorb the rate increase. 

According to reports from the Wall Street Journal, rates will continue to slowly increase in the coming term(s) with officials planning three quarter-point rate increases followed by hikes in 2019 and 2020. The projections for 2018 remain positive, as bank officials expect the U.S. economy to grow by 2.5,  and continue growing through 2020.

Chair of the Federal Reserve, Janet Yellen, offered her confidence in the projections and growth in a news conference, “The global economy is doing well. We’re in a synchronized expansion. This is the first time in many years we’ve seen this… I feel good about the economic outlook.” She also provided reassurance by noting the economy’s growth is not built on a massive amount of unsustainable debt, unlike another not-so-distant time of economic growth.

Click here for more information on rate increases and upcoming term projections:

The Wall Street Journal: Fed Raises Rates, Sticks to Forecast for 2018 Increases

Board of Governors of the Federal Reserve System press release

AXIOMetrics – Market Trends

Last week, AXIOMetrics, a market research company that provides strategic insight reports for real estate professionals, published research detailing November market trends for apartments.

According to the report, “A signal that the national apartment market may be on the road to strengthening in 2018 was sent by November’s performance figures, which showed that annual effective rent growth increased by 21 basis points (bps) to 2.3%. ” This figure stands out because it is only the third time in the past seven years rent growth increased from October to November.

New York, Seattle, and Dallas are metros we are used to seeing toward the top of performance lists, but it is their smaller, surrounding sister cities that have been demonstrating strong numbers. For example, when comparing New York and Long Island, the difference in annual effective rent growth is very apparent. Long Island has averaged 3.8% annual rent growth since 2015. Even though that is middle-of-the-road performance on a national level, it is 250 base points (bps) above New York’s  1.3%. A similar pattern is found when comparing Dallas to Fort Worth and Seattle to Tacoma. 

“To use an age-old axiom in the real estate industry, location certainly does matter. And while not every company’s strategy best aligns with locating in adjacent markets such as these, it should also not be discounted either, as there is potential there for success on a property-by-property or a portfolio-by-portfolio basis.”

AXIOMetrics’ market trends report is filled with useful statistics and visual aids that could affect property and investment strategies, so a personal analysis of the information is advised.

Click here for the full report: AXIOMetrics November 2017 Market Trends

 

United State of America

Tax Reform Advances

Late last week, the Senate passed the proposed tax reform legislation that is set to have a large effect on every taxpayer. Now, the House and Senate will have to hash out reform differences. According to a recent National Multifamily Housing Council (NMHC) article, despite numerous differences between the House and Senate proposals, both leave many critical provisions relevant to multifamily intact. For example:

“Both would allow multifamily firms to continue to fully deduct business interest and engage in like-kind exchanges. Notably, the House bill also maintains 27.5-year depreciation for multifamily buildings whereas the Senate bill extends the recovery period to 30 years for firms wishing to maintain full deductibility of interest. Initially, the Senate sought a 40-year depreciation period for buildings, but NMHC/NAA were able to secure an amendment during committee markup offered by Finance Committee Chairman Orrin Hatch (R-UT) to reduce the period to 30 years. Notably, the Senate bill would require firms wishing to opt out of interest deductibility to depreciate existing buildings over an additional 2.5 years.”

One point the House and Senate differ on is the pass-through rate. Under the House’s proposed bill, multifamily firms will see a portion (30 percent or more depending on capital intensity) of their business income taxed at 25 percent. The Senate’s proposal, “individuals could take a 23 percent deduction on a portion of pass-through income that would generally be limited to a partner’s share of wages paid by the underlying business.”

These are only a few of the possible changes among a vast amount of proposed alterations to the nation’s tax code that could have an adverse effect on the multifamily industry and many others. And with the wheels still in motion and more proposal revisions to come, the aforementioned reform figures are subject to change. So if you’d like learn more detail about the upcoming tax reform and how it could effect you, your investing, or multifamily, click this link for the NMHC article and their related posts: Republican Tax Proposal Nears the Finish Line

Largest San Fransico Landlord Partners with Airbnb

Not long after inking a deal with Florida landlord, Newgard Development Group, Airbnb has signed a deal with San Fransico’s largest landlord, Veritas Investments, and Pillow Residential, a San Fransico-based startup that helps apartment owners turn units into short-term rentals.

According to the partnership, Pillow will now become the preferred partner for landlords enrolled in Airbnb’s Friendly Buildings Program, which allows landlords and tenants to share the revenue generated via home sharing.

Pillow’s services have made short-term renting a more mutually beneficial option for landlord and tenants than ever before. This is achieved by providing tools to each party that helps automate the home sharing process.

For tenants, Pillow’s tools help create Airbnb listings that automatically inputs specific building information such as access codes, emergency contacts, and shared amenities.

For landlords, Pillow automates onboarding tenants and educating them on home sharing, and also provides information about creating and executing home sharing lease addendums.

In addition, landlords are given a dashboard that monitors short-term rentals throughout their properties and indicates if a unit is occupied or available to rent.

It will be worth monitoring how much skin in the multifamily game Airbnb gains as short-term renting become more prevalent via home sharing.

Click on the links below for more information on Airbnb and their transition to the apartment game.

Airbnb Florida

Airbnb San Fransico

NAA Report Points to Orlando

Every quarter, the National Apartment Association (NAA) partners with RealPage to produce a Market Momentum report, which surveys industry executives across the country to reveal the most desirable markets for investing, rent performance, and resident retention.

While there are many varying opinions about what markets are desirable in the current economic climate, according to the most recent Market Momentum report, industry executives see Orlando being a hotspot for near-term multifamily investments.

“Market Momentum survey respondents rank Orlando as the top choice for increasing near-term apartment investment, said RealPage Chief Economist Greg Willett. “Supporting this choice, RealPage stats reveal tight occupancy, solid rent growth and comparatively moderate ongoing building in Orlando. Seattle and Washington, DC remain favored metros, while Sacramento and Los Angeles are moving up the list. Miami, Dallas and Atlanta, markets that previously were viewed favorably, have dropped from the top-rated list.”

NAA President & CEO Robert Pinnegear attests to the value of Market Momentum, noting the wide-range usage the report and the timely data it provides to industry investors and NAA members.

Click here for the full National Apartment Association article: www.naahq.org/orlando

For access to the full Market Momentum 2017 – Q3 click here: NAA Market Momentum

To learn more about NAA member services and sign-up: Member Services

Suburbs More Viable Than You Think?

In a recent article for Multifamily Executive, author Mary Salmonsen discussed what she learned from the MFE Conference in Las Vegas and why some suburban areas across the nation could provide favorable investing conditions for investors, asset managers, and developers.

Despite some fundamental differences and the inherent unknowns that come with penetrating a new market, multiple industry pundits believe the risks might not be as bad one may think.

“I’m convinced that, even at this point in the cycle, you can go to the suburban categories, the right kind of suburbs, and not add any risk to your investment strategy, but actually also achieve a better yield and save a risk-adjusted return,” said Jay Parsons, vice president of MPF Yieldstar, in the opening section of his panel presentation “The Nation’s Strongest Under the Radar Markets,” held Sept. 19 at the MFE Conference in Las Vegas.

Parsons didn’t overlook the obvious advantages of investing in dense, urban areas. He noted factors like construction incentives and more willing investors as main reasons why urban areas are so attractive for multifamily investments and developments. But at the same time, Parsons lists those same urban market strengths as potential barriers as well, due to the cost of investor capital and the extended time it takes to build.

On the other hand, suburban areas have their own barriers to entry. In many cases, suburban cities have more restrictive zoning laws against multifamily properties. Furthermore, suburban locals might show ‘not in my backyard’ resistance to multifamily construction. Having said that, those who can bypass suburban barriers could be in line for better yields with little to no added risk.

Zillow senior economist,  Aaron Terrazas, followed Parsons by taking a more detailed look at the flucuation of rent growth in the country’s strongest metros and cross-examining his findings with Zillow’s ZIP code-level rent appreciation data. He accredited market rent growth to specific local factors like Atlanta’s infrastructure and lifestyle investments or Sacramento being a satellite market to the Bay Area. In summary, Terrazas found that each smaller market that experienced growth had a unique factor that could make it a more attractive to investors and developers than a broader, national report might suggest.

“The reality today is everybody has to do their homework,” Terrazas said. “There’s no single national narrative. Things are local, the story’s local, and you have to look at the whole data to understand what’s happening here. You can’t just take a single national line.”

Click here to read more from Mary Salmonsen and Multifamily Executive

Employment Growth in October

Last week, the Bureau of Labor Statistics (BLS) reported the addition of 261,000 jobs to the U.S. total nonfarm payroll employment during October. The BLS also reported the headline unemployment rate dropped to 4.1 percent – the lowest rate in the past 17 years.

The rebound in employment counteracts the slump in September which can be widely-attributed to Hurricanes Irma and Harvey.

EPIC Asset Management Group

According to the BLS report, employment in the food services and drink places industry spiked in October increasing by +89,000 following September’s decrease of 98,000 due to the hurricanes. The manufacturing sector saw a rise in employment by 24,000 jobs last month while health care added about 22,000 jobs. The professional and business services industry also stayed on pace with its average monthly gain by adding 50,000 jobs to the market.

Other major industries such as mining, construction, retail, government, transportation and warehousing, and information services experienced minimal change during October.

Average hourly earnings for all employees on private nonfarm payrolls only slightly varied in October. But over the last 12 months, average hourly earnings have increased by 63 cents or 2.4 percent.

Click here for the Bureau of Labor Statistics October report in its entirety: www.bls.gov

Getting Ready to Sell Your Community

Analyzing Metrics - EPIC Asset Management Group

In a recent article for the National Apartment Association, author Les Shaver, interviewed some multifamily professionals from Chicago-based AMLI Residential to learn strategies that make selling a community easier by demonstrating uncapitalized property value and analyzing macro data.

“We want to demonstrate value for the buyers by upgrading 20 percent of the apartments, Sarah Wieckowicz, Vice President of Revenue Management at AMLI, said during the Maximize session “Leaving Occupancy Behind: Identifying the Truly Important Measures” last week in Austin. “We can show a potential buyer what kinds of returns they can get.” In other words, leaving some meat on the bone will make your property more attractive to potential buyers when it comes time to sell.

In the process, AMLI is also harnessing the power of advanced metrics. The company is utilizing their access to big data to know when to accelerate or decelerate a rehab process, understand if it’s best to sell or maintain ownership of property, and accurately inform potential and current buyers.

For the entire NAA article and more details on these selling strategies, click here.

 

Airbnb Entering the Apartment Industry

Subleasing is usually something landlords do not prohibit because it’s often a high-risk low-reward situation. But that is not the case for a Newgard Development Group, a major real estate development company out of Florida. Earlier this month, CNET’s Dara Kerr reported the announcement of Airbnb’s new partnership with Newgard Development Group that will be branded as “Niido.”

The partnership will allow Newgard tenants of a 324-unit property in Kissimmee, Florida to utilize short-term leases and sublease their apartment on Airbnb for a maximum of 180 days per year. In return, Airbnb has agreed to share some of the income generated through the listings with Newgard.

Airbnb - EPIC Asset Management Group

The partnership aims to “eliminates barriers by encouraging home sharing and creating solutions that work for everyone,” stated Newgard CEO Harvey Hernandez. Furthermore, Hernandez stated the new business plan should help tenants relieve some financial pressures as cost of living increases by providing extra cash flow through Airbnb listings.  “Niido’s unique multifamily home-sharing model provides a powerful solution to this ongoing problem by delivering extra income for tenants while creating enhanced experiences for their guests.”

Beyond their intial Niido project, Newgard and Airbnb plan on furthering the partnership by building new apartments with the sole purpose of subletting to short-term tenants and tourists.

Click here to read the full CNET article covering the Airbnb/Newgard partnership