January 30, 2019
Accelerating household formation, underpinned by the tight U.S. labor market, will continue to support apartment rental demand in 2019, predicts Marcus & Millichap in its 2019 Multifamily Investment Forecast Report. The report points out evolving recruiting practices and shifting demographics will favor a variety of metros, including several smaller cities.
In addition, tax reform and subdued single-family home sales will restrain the national vacancy rate, despite record apartment construction levels. The coming year offers a dynamic climate for investors, according to the Marcus & Millichap report.
Key report findings include:
- Minneapolis-St. Paul climbed two spots to head this year’s National Multifamily Index. It is the only Midwest market to break into the top 20. San Diego also inched up two notches on solid rent growth to claim second place.
- Neighboring Florida metros Orlando (No. 6) and Tampa-St. Petersburg (No. 12) registered the largest advances in this year’s Index, leaping 11 and nine places, respectively.
- As new households are formed next year, much of the rental demand will center on apartments that serve the traditional workforce: Class B and C properties.
- New inventory largely caters to more affluent renters. As a result, Class A vacancy is expected to rise to 5.8%, while Class B apartment vacancy remains relatively stable at 4.7%. The most affordable segment of the market, Class C apartments, faces strong demand, and vacancy for these rentals is expected to tighten to 3.9%, its lowest year-end level in 19 years.
- While primary markets such as Boston, Los Angeles, the Bay Area and New York City are expected to see the largest dollar rent increases, smaller metros are generating faster increases on a percentage basis. Metros across the Southeast and Midwest in particular are generating outsize employment growth and housing demand.
- Marcus & Millichap notes, upward pressure on short-term yields has increased concern an inverted yield curve could occur, thus weighing down confidence levels and possibly eroding consumption and stalling the growth cycle.
- Most lenders, particularly FannieMae and FreddieMac, have adapted to a more fluid financial climate. When Treasury rates increased in the third quarter, many lenders tightened their spreads to cushion volatility. Marcus & Millichap reports lenders remain cautious, adopting tighter underwriting standards, but aggressively competing to place capital into apartment assets.
- Strong demand drivers supporting long-term yield models will counter-balance much of today’s market volatility, encouraging investors to look beyond any short-term turbulence, predicts Marcus & Millichap.
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