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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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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.  

 

 

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Should You Be Investing Real Estate or the Stock Market?

Good investors are always looking to both grow and protect their wealth while weighing risk and reward. There’s no doubt the stock market and real estate investing are two of the best ways to achieve investor success. The hard part is knowing current and upcoming trends, and how they affect the risk and reward of current and potential investments.

As an investor, you don’t have to be exclusive to stocks or real estate. In fact, it is very common for successful investors to have a stake in both investment types. Having said that, every investor has their own preferences, motivations, and priorities when it comes to where and how they invest their money.

If you’re looking for information on which investment strategy best fits your needs and wants, click here to learn some of the advantages and disadvantages of real estate and stock market investments.

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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.

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Positive 2017 Outlook in Multifamily

In a recent article from Multifamily Executive Magazine, author Mary Salmonsen highlights many positive aspects about the  Multifamily industry to look forward to in 2017. This article contains data furnished by Yardi Matrix, a leading commercial real estate research and data platform focus this industry.

You can view this article in its entirety here.