Growth Cycle Invigorated by Conﬁdence; Tax Laws Could Transform Housing...
National Multifamily Index (NMI)
Driven by robust employment in the tech sector and soaring home prices that keep rental demand ahead of elevated deliveries, Seattle tops the Index. The metro edged out Los Angeles (#2), which despite strong rent growth and rocketing home prices was held back by weaker economic trends.
Secondary markets show strength as employment growth and tight vacancy rates stand out in metros such as Riverside-San Bernardino (#8), Phoenix (#12), Denver (#13), and Orlando (#16). These smaller markets’ economies have quickly adjusted to the tightening labor market to keep expanding employment and growing rental housing demand.
Companies have considerable staffing needs, but with unemployment entrenched near 4 percent, they will continue to face challenges in ﬁlling available positions. These tight labor conditions should place additional upward pressure on wages, potentially boosting inﬂ ationary pressure in the coming year.
The strong employment market, rising wages and elevated conﬁdence levels could unlock accelerated household formation, particularly by young adults.
One factor that could weigh on economic expansion under the new tax laws is the housing sector, which added just 3 percent to the economy last year, about two-thirds of normal levels. The new laws could cause homebuilders to reduce construction while shifting a portion of the housing demand from homeownership to rentals, and a rental housing shortage could ensue.
National Apartment Overview
Steady job creation, above-trend household formation and elevated single-family home prices have converged to counterbalance the addition of 1.37 million apartments over the last ﬁve years, at least on a macro level, easing concerns of overdevelopment.
In the coming year, rising development costs, tighter construction ﬁnancing and mounting caution levels will curb the pace of additions from the 380,000 units delivered in 2017 to approximately 335,000 apartments. Although the pace of apartment completions will moderate in 2018, new additions will still likely outpace absorption.
Nationally, Class A vacancy rates advanced to 6.3 percent in 2017 and will continue their climb to the 6.8 percent range over the next year. Vacancy rates for Class B and C assets will rise less signiﬁcantly in 2018, pushing to 5.0 percent and 4.7 percent, respectively. Average rent growth will taper to 3.1 percent in 2018 as concessions become more prevalent, particularly in Class A properties.
The Fed is widely expected to continue raising its overnight rate through 2018 to restrain potential inﬂation risk. Average apartment cap rates remained relatively stable in the low-5 percent range for the last 18 months, with a yield spread above the 10-year Treasury of about 280 basis points. Many believe cap rates will rise in tandem with interest rates, but this has not been the case historically.
Debt availability for apartment assets remains abundant with Fannie Mae and Freddie Mac continuing to serve a signiﬁ cant portion of the multifamily ﬁnancing, local and regional banks targeting smaller transactions and insurance companies handling larger transactions with low-leverage needs.
The prospects of a rising interest rate environment could weigh on buyer activity as the yield spread tightens. Cap rates have ﬂattened over the past two years as the outlook for apartment fundamentals remains positive but has moderated. The apartment investment environment will further migrate from aggressive growth to a more stable and balanced growth pattern.
In order to ﬁnd investment options with upside potential, investors may examine recalibrating their strategies to expand their search criteria for acquisitions to a wider pool of secondary or even tertiary markets, consider outer-ring suburban locations and even explore deeper into Class B assets.