June 22, 2018
The economy is a topic that’s at the top of everyone in commercial real estate’s mind. Next week at Connect Apartments, a featured Boom, Bubble or Bust panel will take a deep dive into the state of the economy as it relates to the multifamily sector across the nation. To register for the June 26th conference in Los Angeles click on this link: Connect Apartments.
Marcus & Millichap’s John Chang will be leading a discussion into the demographic trends, wage growth and global factors affecting the rental market. He answers a few of those questions in our latest 3 CRE Q&A.
Q: What are the biggest trends shaping the U.S. economy today?
A: The single biggest factor shaping the U.S. economy at this point is the new tax law- not the tax reductions and rules themselves so much as how the changes have affected confidence levels. Consumer and business confidence are at or near record highs, and this in turn is changing behavior. Companies accelerated hiring and significantly increased investment in infrastructure, while consumers have increased spending. This is fueling faster growth, which is raising inflationary pressure and causing the Fed to raise rates. For apartment investors, these trends will boost housing demand, but they will also elevate operating costs and interest rates on capital.
Q: How are those factors, or others, like interest rates or tax reform, affecting the multifamily rental market?
A: The multifamily rental market is exceptionally well positioned, particularly traditional workforce housing (Class B and C assets) which face limited supply addition risks. The very low unemployment rate, together with the record high number of job openings, will place upward pressure on wage growth, which will accelerate household formation. As new households are formed, they generally favor rentals, driving apartment demand. At the same time, several factors are slowing the transition out of apartments into homeownership – rising home prices, rising mortgage rates, limited for-sale housing inventory and still-tight lending requirements are all restraining home purchases. This combination will support strong apartment performance until the macro economic trends lose momentum.
Q: What advice can you share to help guide multifamily investors in making smarter decisions, given the state of the market and length of current cycle?
A: The big picture perspective remains exceptionally strong, with the economy and apartment supply and demand trends favoring the sector. That doesn’t mean investors won’t face numerous risks. Multifamily owners must carefully consider their tactical environment – local job creation, local construction levels and areas of concentration, and increasingly, local government policies. Investors should closely evaluate the competitive space and operating environment of each asset they own, and consider whether each property aligns with their strategy and yield requirements. And, investors should do this soon. Several benefits of the new tax law are only available for a limited time, and potentially rising interest rates could erode future purchasing power. Investors have a unique window of opportunity to optimize their portfolios, and they should capitalize on it now.
For comments, questions or concerns, please contact Dennis Kaiser