May 17, 2018
Most people who know about real estate understand the multifamily sector continues strong. But with more supply coming online, how long will the strength continue? And, how much supply is too much supply?
These and other issues were addressed by Jeff Adler and Jack Kern with Yardi Matrix at the “2018 U.S. Multifamily Market Update” webinar, which took place May 17. The main takeaways from the event were:
- The U.S. economy is doing well, and will continue to do so, thanks to increasing jobs
- Multifamily rents are taking a slight hit, as more supply is being added to certain areas, and homeowner rates are increasing
- Fundamentals over the next couple of years will favor secondary and tertiary markets
When it came to supply, Kern and Adler focused on the fact that much of what is being delivered continues to be at the high end, as the United States doesn’t have the capability for a coordinated effort to build and open Class B or C properties. As a result, “rents are leveling off at the high end,” Kern observed.
Another interesting fundamental is that population is moving away from the gateway markets to secondary markets, because that’s where the jobs seem to be going. Also having an impact on those markets? Tax reform, which Kern said would impact where people go for jobs. On the up side, “the longer the economic expansion, the better for the secondary cities,” Kern said.
On the other side of the coin, secondary markets tend to be more volatile. As such, Kern warned investors to beware of a potential liquidity trap if buying or building multifamily properties in these markets. “Organize your debt and leverage in those locations, so you don’t run into a problem, should the market undergo a correction,” he said.
The secondary and tertiary markets, in fact, will be at risk of oversupply for the next couple of years, Adler and Kern said. However, buyers and builders should be careful not to make regional blanket assumptions. “When you’re studying places with new supply, look at a map,” Kern advised. “Drill into the micro-markets and see what’s going on there.”
Kern’s and Adler’s conclusion was that apartment markets aren’t in bad shape at this point – but it’s important to be very local when deciding when and where to build or buy. Kern indicated that, when it comes to pinpointing viable areas, investors and developers need to be careful to know where the supply is coming from. “Focus on where the supply isn’t, which places have intellectual capital growth, and where creative work is going on,” Kern added.
For comments, questions or concerns, please contact Amy Sorter