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Major Takeaways: Yardi Multifamily Report – October 2019

The extended period of good performance has produced one bad side effect: legislation enacted in three states to limit rent growth and pressure to act in more states. After a period of below-par growth in housing stock, the U.S. needs more units built, but rent control moves the needle in the opposite direction.

Earlier this week, Yardi Matrix issued its National Multifamily Report for October that highlighted supply and demand, rent growth trends, and political activity as we approached the end of Q4.

Yardi

 

According to the report, multifamily rent growth inched upward in October, as the average U.S. multifamily rent increased by $1 to $1,476. Year-over-year rent growth remained at 3.2%. Despite the expected slower month during the fourth quarter, Yardi expects continuous demand a slowly growing economy to keep rent growth above its long-term average.

The multifamily sector’s continuous strength over multiple years has resulted in an elevated number of rent-burdened households. In consequence, an increase in political pressure has yielded new rent control laws in three states: New York, California, and Oregon.

According to the Joint Center of Housing Studies at Harvard University, “More than 20 million renter households spend over 30% of income on housing, and 80% of renters and 63% of owners making less than $30,000 are cost-burdened.”

Yardi dubs rent control as counterproductive as it reduces investment, limits new development which perpetuates unaffordability, increases the cost burden on those who move or enter a new market, and reduces the incentive to make capital improvements which leads to degradation of already existing stock. Outlined affordability solutions include reducing exclusionary zoning, allowing more density, and more subsidized new developments.

Click here to view Yardi Matrix’s October Multifamily National Report in its entirety

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Statewide Rent Control in California

The California legislature recently passed a bill called Assembly Bill 1842 designed to enact rent control and protect tenants. Despite its intended purpose, many believe the new law will be detrimental to tenants, owners, developers, and the national apartment industry.

California Statewide Rent Control

The new law, Tenant Protection Act of 2019, outlines a cap on annual rent increases at 5 percent plus inflation for any and all buildings 15 years or older, determined by the property’s initial certificate of occupancy. An estimated two million additional apartments are expected to be impacted by rent control as a result of Assembly Bill 1842 passing.

Other key provisions include:

  • Does not contain vacancy decontrol provisions, so units can return to market rent prices when vacated
  • Beginning January 1, 2020, requires landlords to have just cause in order to evict tenants
    for tenants who have occupied a unit for at least 12 months, or up to 24 months when an
    adult tenant adds onto a lease (change in roommates)
  • Requires landlords to provide relocation assistance via one month’s rent or rent waiver for no-fault evictions within 15 calendar days of serving notice, and to notify tenants of the relocation assistance.
  • Contains a 10-year sunset, so the requirements in the bill will expire in 2030.

See this California Rental Housing Association Rent Control Fact Sheet for more information on Assembly Bill 1482.


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Why Upcoming Fed Policy Changes Reinforce Positive CRE Outlook

Earlier this week, CNBC interviewed Marcus & Millichap’s President and CEO Hessam Nadji to discuss why upcoming Fed Policy changes and strong fundamentals reinforce a positive commercial real estate (CRE) outlook. Some major takeaways from the interview include:

  • Lower rates energize the market, Fed rates shifted from a headwind to tailwind.
    • Nadji explains how a Fed reversal turned what was considered a negative policy change at the end of last year into a positive one this year by stating, “The fed is now so accommodative in messaging that they’re going to be facilitating the life of this expansion, and not becoming a headwind to it. And of course, lower rates lubricate the market. “
  • Lack of overbuilding has resulted in a longer positive outlook for CRE.
    • Nadji attributes a lack of overbuilding in commercial real estate to the boom of E-commerce.

“Office space, for example, has been adding about 1/3 to 1/2 of new product compared to the prior peak of the cycle. Look at retail space in reaction to whats happened to E-commerce. The volume of any kind of retail being built is less than a 1/3 of what it was year-over-year prior to the last recession. That lack of overbuilding plus an economy that’s adding over 2 million jobs a year consistently in a low-interest-rate environment all spells a pretty good outlook for CRE.”

  • Tech expansion boosts demand for industrial real estates like warehouses, distribution centers, or storage facilities. E-commerce has been tough on traditional retail.
    • Tech-oriented metros experiencing increased rental demand for new hires.

Click here to watch the full four-minute CNBC interview with Marcus & Millichap’s President and CEO Hessam Nadji

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Top Markets for Occupancy Growth Through April – Yardi Matrix

Earlier this week, Multi-Housing News posted an article highlighting takeaways from a recent Yardi Matrix report pertaining to occupancy growth through the first quarter of 2019. According to the numbers, the nation’s average occupancy rate decreased by 20 points year-over-year through April to 95 percent.

Despite the step back on a national level, the five markets highlighted by Multi-Housing News are defying the odds and have emerged as frontrunners for occupancy growth through April 2019.

The occupancy growth in these markets can be accredited to beneficial market characteristics such as strong demographic trends, favorable business climates, modest development in surrounding areas, and steady employment gains.

Click here for the full Multi-Housing News article and additional Yardi Metrix statistics regarding the highlighted markets and occupancy growth.

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Traders Confident of Interest Rate Cut in July

Last week, an unprecedented amount of traders in the fed funds futures market made bets with high expectations of an interest rate cut in the near future.  The high volume of trading came as no surprise as many traders had already expressed confidence in the first quarter that a rate cut was coming. Their confidence only increased after the post-Federal Open Market Committee statement and forecasting materials pointed to a possible rate cut in the coming months.

According to CNBC’s Jeff Cox, “The market now sees a 100% chance of a rate cut at the July 30-31 meeting, up from 85% a week ago and just 15% a month ago. For the full year, the expectation for three cuts is 66% up from 59% a week ago and a mere 4% last month. ”

The record-setting volume of trading was fetched at the end of the week after the central bank concluded its two-day policy meetings. The week’s volume was tracked above 3.5 million contracts, easily topping the best week ever in May 2018 at 1.19 million contracts.

Click here to read the Traders This Week Bet on a Fed Rate Cut in Record-Setting Numbers article in its entirety 

 

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Multifamily in 2019

Despite some reservations before the start of the year, multifamily real estate performed well in 2018. But as we look toward the beginning of the new year, it would prudent of investors and owners to prepare for as the market is expected to shift in a different direction.

Earlier this week, Karlin Conklin, a value-add multifamily expert with a transactional volume exceeding $1.3 billion, outlined three primary factors that could shift the multifamily market in the upcoming year including “pressure from volatile financial markets, a growing housing supply, and emerging development risks.”

Interest Rates And Multifamily

With the economy cruising at a comfortable level, The Federal Reserve has had their foot on the break throughout 2018. It raised the federal funds rate to a 2 percent to 2.25 percent during its November meeting, making it the third rate increase of 2018. A fourth and final increase is expected to come during the Fed’s December meeting. But how will this affect multifamily real estate in the coming months?b1da3076093b404ea90f5996c18540df.jpgAccording to Conklin, debt pricing “looms as the largest multifamily market mover in the coming year… And more so than any other investment, real estate class, or multifamily asset, pricing is tied to debt pricing.” Overall, as borrowing becomes more expensive, the more cap rates will have to be adjusted; and as a result, Conklin sees 2019 as more of a buyer’s market with acquisitions being motivated by assets that are “right priced” to account for rising interest rates.

Supply or Demand?

Throughout 2018, operating dynamics were favorable for multifamily real estate. The combination of increasing rents and high occupancies often resulted in operating expense surpluses. Although, that sweet spot did not last forever. In fact, the industry has started to see a decline in demand, and many markets are now over-supplied. Conklin uses Seattle and Boston has prime examples. Over the last five years, the two markets had “red-hot rent growth” and attracted plenty of developers to capitalize on the high demand and low supply.

Fast forward to November 2018. Seattle and Boston are now pushing through multifamily deliveries that ” put the brakes on rent growth to levels between 0% and 1.5% on a year-over-year Q3-2018 basis, according to Zillow. That compares with annualized rent increases from 2015 to 2017 near 7% in Seattle and 5% in Boston and Nashville.”

In summary, it’s important for investors, owners, and developers to realize how new deliveries are, and will, impact asset values in their current and prospective markets as demand and supply begin to invert.

Development Risks

Beyond the macroeconomic factors that consistently dictate multifamily trends, variables such as trade tariffs, labor shortages, and local government regulation will shape the path for multifamily real estate’s near future.

On a national level, trade tariffs on materials such as steel, lumber, and electronic components have bumped the cost of construction line items by more than 10 percent year-over-year. There has been a specific labor shortage in the construction sector due to a rise in labor costs. The National Association of Home Builders reported in a recent survey that 69% of its members were experiencing delays in completing projects on time due to a shortage of qualified workers, while other jobs were lost altogether.

Post-recession rent growth has put housing affordability in the spotlight, and local governments in some markets are responding with affordable set-aside mandates and rent control proposals. For example, many cities in California have seen the number of citizens vying for citywide rent control vastly increase. Fortunately for multifamily investors and professionals, rent control propositions in California have generally been unsuccessful.

Overall, Conklin still sees opportunities for new construction and renovation in 2019, but with a thinner margin of error.

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Click Here if you’d like to read Karlin Conklin’s article in its entirety.

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