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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Increasing Value

You just won the bid on that property you’ve been working towards for the past few months, so what’s the next step? Well, first you celebrate, because it’s no small feat beating the competition to become the new owner(s) of a multifamily property. Once you’ve toasted to your hard-fought victory, it’s time to start making the most of your investment. The most important factor in maximizing return on investment is increasing the value of your property as much as possible. 

Looking at it from the most simplistic standpoint, value is affected in two ways: Increasing income and/or decreasing expenses. Having said that, there are an abundance of ways to maximize your property’s income and minimize its required expenses. The most successful properties simultaneously and efficiently achieve both of these goals.

A good starting point to raise the value of your new property is making minor repairs and improvements you noticed when you initially toured the property. Improvements like fixing cracks in sidewalks, replaces window screens, or repainting doors or balconies will give your property the face lift it needs to rejuvenate its curb appeal. This can be an inexpensive way of increasing the marketability of your property and a stepping stone to greater improvements that will elevate it a new level of value.  

When it comes to decreasing expenses, one of our first courses of  action is implementing water conservation. Toilets use the most water out of all the bathroom fixtures, so installing low-flow toilets can save property owners a fortune in utilities. Also, toilets tend to leak, so proactive maintenance will save money in the long run.

In addition to water conservation, employing the right amount of staff is very important. Employing too many people can be a waste of man power and capital, so don’t be afraid to layoff a few employees if the property doesn’t benefit from their presence. Furthermore, hiring the right employees can greatly increase your properties value. For example, hiring a maintenance crew with a diversity of skills has multiple advantages. Most importantly, a multi-skilled maintenance crew reduces the need of deferred maintenance, thus, lowering overall property expenses. Additionally, being able to perform in-house maintenance means repairs and improvements can be completed much faster.

This post is meant to merely touch on a few examples of increasing value through increased income and decreased expenses, so keep an eye out for our upcoming blog posts as we will be discussing maximizing incomes and minimizing expenses in greater detail.


DFW on the Move

In a recent article in D Magazine, author Brian O’Boyle briefly discussed projected and current trends in the Dallas-Fort Worth (DFW) area for multifamily housing. To sum it up, DFW continues to be a hotbed of growth with buyers focusing on “value-add” products.  In addition, a projected 29,000 new units are to be added to market, along with construction entering some of the northern suburban areas.

O’Boyle is the founder and vice chairman of ARA, A Newmark Company Dallas office. ARA is the largest full-service investment advisory firm in the nation that focuses exclusively on the brokerage, financing and capital sourcing of multifamily properties.

You can read the article in full detail by clicking here, or the hotlink provided above.