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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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Major Takeaways from the NMHC Apartment Outlook for 2018

Digested from National Real Estate Investor

With demand holding strong, 2018 is expected to be a fruitful year for the multifamily industry. That is the general consensus at the National Multifamily Housing Council (NMHC) Annual Meeting in Orlando, FL., being held this week. Having said that, there is a feeling of reserved optimism among attendees and experts of the NMHC Outlook Meeting due to expected interest rate increases, more supply coming to market, and the market naturally moving to the mature/declining stages of the industry cycle. Here are some major takeaways from the opening-day events. 

  1.  There could be four interest rate increases this year. During its December meeting, The Federal Reserve indicated that it plans on hiking interest rates at least three times this year to stay on par with the economy’s strength. However,  Richard Barkham, a global chief economist at real estate services firm CBRE, thinks there could be a fourth rate increase later in the year. In addition, the U.S. is expected to transfer from negative interest rates to positive ones, which is interest rates minus inflation. Barkham notes that negatives rates are an indication of the benefits of monetary policy support.
  2. The economy may enter a declining state in the next three or four years. Despite an expected decline in the economy, Barkham expects the multifamily industry to weather recession easier than other asset classes given the shift in homeownership numbers.
  3. Blue collar areas and workforce housing present key opportunities for growth in the current environment. Greg Willett, chief economist at RealPage, a Texas-based firm providing property management software solutions, says regions with a high volume of blue-collar workers have provided consistent rent growth, despite a lack of construction happening in said areas.
  4. There is a bifurcation in rents between class-A and class-B apartments. Jay Lybik, vice president of research services at Marcus & Millichap, attributes the disparity between class-A and class-B apartments to the change in the provided product that’s being built. During the early 2000s, 90 percent of new builds were garden-style apartments. Recently, 75 percent of new supply are mid- and high-rise style apartments. The gap between class-A and class-B was approximately $225 in rent. Lybik notes the gap has increased to $525. Currently, Boston is experiencing the largest rent gap between class-A and class-B apartments, with rent difference of a whopping $1,170.
  5. Increased scrutiny is key when it comes to development. As the economy begins to phase into the mature stage of the industry cycle, margins of error are beginning to tighten. Interest rates continue to climb, rent growth begins to slow, land is becoming more expensive, and labor costs are rising. So the importance of ‘picking the right fight’ is more prominent than ever. That said, the same narrowing margin of error prompting caution simultaneously result in higher quality deals being executed in a more disciplined manner.
  6. Despite an expected deceleration of new builds in 2018, some metros might out-build their demand.  High-demand markets such as Dallas or Seattle are at risk of bringing too much new inventory to the market that could outpace rent growth, according to Willett. Other markets on Willett’s watch list include Denver, Boston, Nashville, Tenn. and Charlotte, N.C.

Click here for more information on the NMHC Annual Meeting: National Multifamily Housing Council

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.