Freddie Mac’s multifamily outlook report projects that growth will be favorable in 2014, but will also moderate and become more in line with long-run historical levels.
Multifamily rent growth and vacancy in the coming year will be consistent with long-run average performance at the national level, but will slow a bit from 2013.
“As the broader economy continues to grow, we expect the overall multifamily sector to remain strong in 2014. Revenue growth in the industry will continue to perform near or above historical averages, but at lower rates than the previous two years,” said David Brickman, executive vice president of Freddie Mac Multifamily. “The growth in some markets, however, has already slowed down and vacancy rates in a select few are inching up.”
Freddie Max forecasts that cap rates will remain below 7% for the next few years. As interest rates rise, the cap rate spread will tighten. The projected positive effective income growth will drive property values higher, albeit at lower rates than last year.
Vacancy rates in many major markets are below historical norm rates lessening concerns about overbuilding in these markets. Current vacancy rates in Washington, D.C., and Norfolk, Va., are higher than historical averages which puts these markets at a higher risk of a market slowdown with further increases in supply.
Multifamily construction starts picked up in 2013, reaching the level in line with starts during the pre-recession period. Multifamily completions, which lag construction starts, are expected to catch up in 2014. Nationally, the new supply is in balance with the demand.
National level gross effective income is expected to slow to 3.2% from 3.6% in 2013, and vacancy rates will increase to 4.7% from the current 4.1%. The Denver, Seattle, Chicago, Boston, and California markets are projected to top the list of the markets with strongest effective income growth.
A complete copy of Freddie Mac’s outlook can be found here.