A new report from Yardi indicates that though there are headwinds slowing the multifamily market, strong fundamentals will keep the plane cruising at altitude.
Here’s the tale of the tape:
- Millennial and Baby Boomer demand for apartments
- High occupancy (hovering around 95%)
- Long and controlled construction pipeline
- Investor preference for multifamily assets
- Healthy economy
- Rising interest rates
- Slow wage growth
- Rising construction costs
- Late cycle
Despite the rapidly aging cycle, demographic factors and growth in the well-balanced Southern and Western U.S. metros will maintain moderate rent growth resulting in a nationwide rent growth of 2.9%, just under the historical average.
Supply is settling into a steady pace (350,000 to 400,000 units are slated to deliver by year’s end, according to National Multifamily Housing Council), and 625,000 units are under construction now. Yardi predicts that only 290,000 units will deliver this year, which represents a 2.2% increase in total apartment stock.
Rising construction costs and worker shortages have lengthened the delivery timeline (many will deliver in 2019), according to the report, which is another backstop for rent growth, minimizing, or indeed eliminating, the risk of overbuilding. Yardi cites these as the factors in its prediction that only 290,000 units will deliver this year.
Much of the absorption will take place in Southern and Western markets like Dallas and Denver where growth, demand and development are all high.
Capital continues to show a strong preference for multifamily assets, and according to Yardi’s report, despite growing unease about the impending end of the cycle, there is an overabundance of capital, and more investors are looking to buy than sell. Delinquencies are practically non-existent in the multifamily sector, and the risk to investors is quite low thanks to hitherto insatiable demand for rental properties, responsible building and a strong economy.
According to the report, many investors are switching to a debt strategy instead of taking an equity position because the cycle is winding down.
This has helped to mitigate the effect of the rising interest rates, which is making it easier for borrowers to stomach the increase in borrowing prices and keeps the marketing rolling along, albeit slowly.
Lump all these factors together and what’s left is a multifamily market settling into a long, demographic and economic-fueled cruise.