National Multifamily Index (NMI)
Strength across the board in fundamentals, regional economic growth and rising valuations catapulted Orlando (#1) to the top position for the 2020 Index, up five places from six months ago. Robust apartment absorption has outpaced or matched recent supply additions, resulting in rent growth above the national rate, which is forecasted to continue for the coming year.
Tampa-St. Petersburg (#5) broke into the top five due to a solid multifamily outlook and local cap rates compressing to their cycle low. Phoenix’s (#6) rise persists as it moved up two notches and sits poised to break into the top five if it beats the current absorption forecasts and fills its cycle-high deliveries in 2020.
With the national unemployment rate hovering near a 50-year low in the mid-3 percent range, job creation will remain strong but taper from last year as organizations face the difficult task of finding qualified workers.
The tight hiring market will continue to place upward pressure on wage growth, supporting 3 percent gains and pushing disposable income to a record high. Plentiful jobs and climbing incomes will deliver elevated household formation once again this year.
Household growth this year will be 12 percent above the current cycle’s yearly average as 1.3 million new households are formed. This will generate additional demand for rental housing as households have continued to show a strong preference for renting over owning.
Though several tariffs were put on hold in the back half of 2019 and a phase one trade deal was reached, ongoing negotiations may spill over into 2020 and restrain growth. Additional pressure from slowing international economies and the potential impact of Brexit could further taper domestic expansion. Still, key benchmarks such as Small Business Optimism and the ISM Non-Manufacturing Index remain strong, supporting the 2020 economic outlook.
National Apartment Overview
After coming off the second highest year of apartment absorption of this cycle, demand will moderate this year but solid leasing activity will keep the national vacancy rate below 4.5 percent.
Despite the significant inventory gains, developers have been effective in aligning new supply with job creation and population growth, keeping most markets in the U.S. in balance. Sunbelt markets, which receive a disproportionate in-migration of young adults, remain a focal point for developers, although major job hubs such as New York City, Seattle-Tacoma and San Jose have also attracted a considerable volume of supply additions.
The expected modest uptick in the national apartment vacancy rate in 2020 reflects a shortage of Class B/C apartments rather than a slackening of demand. With workforce housing vacancy at its lowest level in 20 years, prospective renters will face difficulty finding an available unit to occupy.
The Federal Reserve will balance a whirlwind of economic and geopolitical forces this year as it sets policies to sustain domestic growth. Based on policy statements at the end of 2019, few changes are expected this year, but Chairman Jerome Powell has reemphasized that the Committee will continue to monitor conditions as they develop and set policy accordingly.
Invigorated by increased Fannie Mae and Freddie Mac lending, apartment debt financing will remain highly liquid this year. In addition to the Government Sponsored Enterprises (GSE), a variety of local, regional and national banks, pension funds, insurance companies, and CMBS sources will be active.
The current wide spread between Treasurys and multifamily cap rates offers investors an attractive yet relatively stable return, which should keep upward pressure on demand for assets.
Overall, the current pricing environment allows both buyers and sellers to find a positive reason to transact. Sellers can take advantage of valuations holding near the cycle peak while buyers can secure assets with attractive yields.