As we shake the dust of 2016 off our feet, what can we expect the coming year to hold for the multifamily sector? The economy’s steady recovery has increased consumer confidence in the past year, and job growth in many markets helped demand to outstrip supply of multifamily housing, despite continued brisk activity in development and construction.
In their latest Trends report, PWC and the Urban Land Institute neatly summarize the current climate for multi-family:
A number of factors account for the enduring strength of the apartment sector:
- entry into the job market of the massive millennial generation, who are a prime age cohort for rentals
- consumers’ wariness of for-sale housing product following its massive loss in value during the housing market crash of 2008
- credit issues for consumers, compounded by student debt, and tightened bank requirements for home mortgages
- general consumer preference to remain flexible in their lifestyles, which is facilitated by rental housing.
With this information in hand, we can make some informed predictions about the course of multifamily in the coming year.
Robust Markets in the South and West
Fueled by job growth, particularly in the tech sector, multifamily properties in Florida, Texas, and California are particularly attractive to investors. The trends report lists these markets as the top 10 cities for multifamily investment in 2017:
- San Antonio
- Ft. Lauderdale
- San Diego
- Dallas-Ft. Worth
- San Jose
- The Inland Empire (Southern California)
Strong markets are certainly not restricted to these regions. Strong job growth is heating up the multifamily sector in smaller metros like Nashville, Charlotte, Raleigh/ Durham, Portland, and Phoenix.
Declining Rate of Home Ownership
Multi-family properties are heavily affected by the millennials’ preference for renting over home ownership. According a report from Harvard, two-thirds of them currently rent their homes. This is due in part to the economic downturn, student loan debt, and a tough job market, but it also has a lot to do with their approach to living. They prefer the flexibility of renting, which makes relocation less complicated.
ULI’s report shares specific numbers on what we can expect in terms of home ownership in the coming years:
The sharing economy’s de-emphasis on ownership will be reflected in soaring demand for rental units. Well over half of the 12.5 million net new households created over the next decade will rent, including those who have never owned, and those making the switch from owning to renting as they age. Homeownership will decline, with the national rate anticipated to be 60.8 percent by 2025, the lowest point since the 1950s.
Rent Growth Slows
While the proportion of the population that rents their home will continue to rise, that’s not enough to support the rate of growth we’ve been seeing in rents. Particularly with continued low inflation, it’s not sustainable.
The Wall Street Journal holds that robust construction activity in recent years has increased the multi-family inventory to the point that rent growth will likely slow this year:
After a five-year boom in which rents have jumped by about 20% nationwide, some of the nation’s biggest cities—New York, San Francisco, Seattle and Boston among them—are beginning to see slower increases. Annual rent growth for high-end urban apartments peaked at nearly 8% at the end of 2011 and has since slowed to just over 3%, according to MPF Research, which tracks the apartment market.
Especially in markets with high rates of job growth, affordability is a key issue for renters. Local and national governments are moving to incentivize the development of inclusionary properties that provide housing options for lower and middle-income renters. Proposals to put inclusionary zoning in place or strengthen existing policies are underway in Atlanta, Baltimore, Detroit, Los Angeles, Nashville, Pittsburgh, Portland, Seattle, and Washington, D.C., and other cities.
Changing Consumer Demographics
The target demographic for multifamily is evolving, and this will be a factor in the coming year. Two groups are especially significant here, according to the Trends report: affluent immigrants and retirees.
It’s estimated that by 2025, immigration will account for more than half of the population growth in the U.S. Most of these will be highly educated, middle and upper-income families, and will be a significant portion of the pool of multifamily tenants.
Baby-boomers are increasingly interested in simplifying their living arrangements, and many are looking to relocate to urban centers. As the overall population continues to age, the multi-family sector will be moving to accommodate the needs and lifestyles of retirees.