Written by Mike Aiken
Continued job growth, household formation, affordability may lead multifamily investment trends in the new year.
As we approach the close of 2018—which marks the eighth consecutive year of growth for multifamily—many industry participants are looking for a temperature reading on the market moving into the new year. Despite higher levels of supply, the relative health of the multifamily market carried the industry in the past few quarters and is a testament to the sector’s strong fundamentals.
Looking ahead, continued job growth, household formation, and affordability may be the keys for multifamily investments for the next year. Here are five 2019 investment trends to watch:
1. Apartment Demand and Job Growth Generally speaking, job growth coupled with household formations are the key indicators for investment forecasting. Not discounting major variables that would impact the macroeconomy, the strong labor market is expected to continue fueling household creation.
The U.S. Census Bureau recently reported that multifamily completions in five-plus–unit dwellings increased by 11% in the first half of 2018. While job growth is expected to slow and moderate due to less slack remaining in the labor market, demographics and lifestyle preferences will continue to support multifamily household formation. Additionally, some anticipate that the Tax Cuts and Jobs Act of 2017 could potentially incentivize renter formations over homeownership.
2. Continued Success in the Sun Belt Another big investment trend is happening in the Sunbelt. We’ve seen supply top off in the Southeast, and, assuming job growth continues at its current pace, many anticipate improvement in the suburban Sun Belt markets, with 2% to 3% year-over-year (YOY) growth in areas such as Raleigh and Charlotte, N.C., as well as Dallas. Additionally, some larger markets, including Atlanta, Houston, and Jacksonville, Fla., could see as much as 3% to 5% YOY growth.
3. Rising Interest Rates: How Much Do They Matter? From an acquisition standpoint, rising interest rates create challenges for going-in yields, which is especially difficult for investors who are more sensitive to cash flow versus total return. It’s uncertain whether higher interest rates would push a segment of the buyer pool to the sidelines or whether asset-level pricing would adjust. The most recent evidence of related market behavior, following an interest-rate mini-spike in early 2017, pointed toward less transaction volume rather than sellers accepting lower asset-level values.
"The main exposure affecting today’s investors will likely center around affordability for consumers rather than interest rates."
From an apartment fundamental standpoint, higher interest rates create positive tailwinds because the cost to finance a home purchase increases as renters weigh whether to buy or rent. All that said, rising interest rates may not be the most significant risk for apartment owners in the new year. According to a recent report from Pew Charitable Trusts, since 2001, we’ve seen a 51% increase in rent and a widening gap between income and rent growth. The main exposure affecting today’s investors will likely center around affordability for consumers rather than interest rates.
4. Surge in “Upper Workforce” Submarkets Many investors are now looking outside of core markets and considering alternatives in how they allocate their investment dollars. At Fogelman, one alternative strategy we use is focusing on “upper workforce” submarkets, where the rent levels for existing product don’t justify new construction but the submarket still contains a strong set of demand drivers for the “gray collar” population. Within such submarkets, investors can see the benefit of a growing macroeconomy, within a major metropolitan statistical area, that creates housing demand while avoiding the higher levels of supply found in many “A” quality areas today.
5. Eye on the Target In 2019, we’ll see yields continue to compress while owners and operators focus on expenses, reduce costly on-site team turnover, and provide valuable services to residents in order to drive ancillary revenue. For renovations, our focus is on proven strategies: Time-tested enhancements, such as improving apartment flooring, countertops, and appliances, make an immediate impression on prospective residents. Community curb appeal is another area of emphasis, as the first impression is the most important.
What do you think about these investment trends? Leave us a comment or question below!