The Case for the Continued Strength of the Multifamily Sector in 2019
Capital One’s survey conducted at the National Multifamily Housing Council’s annual conference earlier this year offered a lot of food for thought regarding the outlook for the multifamily sector in 2019.
The vast majority of respondents — 70 percent — believe that we’re nearing the end of the current economic cycle. But despite that notion and despite the 70 percent who are concerned about either rising costs or interest rates, plenty of optimism remains. To this point, 37 percent cited strong fundamentals and 29 percent pointed to an abundance of capital to deploy as drivers of another strong year in this all-important segment this year.
Indeed, Freddie Mac predicts multifamily origination volume will grow to $317 billion this year, driven by solid market fundamentals and strong investor demand for properties. The 2019 figure will exceed by 3.9 percent the $305 billion in originations that had been estimated for 2018.
Nowhere is this trend more visible than in the New York multifamily market, where demand continues to boom. We see this pattern play out in places like Long Island’s Nassau County, where there’s a definite lack of multifamily inventory in locations like Garden City and New Hyde Park, and where new buildings are going up rapidly in places like Glen Cove and Mineola. These submarkets continue to attract renters at robust prices. The same goes for secondary and tertiary markets in that area that have traditionally been less attractive.
At Capital One, we’re originating loans for multifamily projects in places which wouldn’t be considered by most as ideal options for commuters. But they’re continuing to fill up quickly, including on the higher end of the market. Meanwhile, in Long Island City, there was tremendous anticipation of the arrival of Amazon’s new headquarters, which spurred the creation of significant multifamily inventory.
While it will be interesting to see how that inventory will fare in light of Amazon’s decision to reverse course, construction in Long Island City continues at a notable clip, spurred by the neighborhood’s ongoing transformation. And the multifamily outlook for all of Long Island looks relatively rosy: Yardi Matrix, a commercial real estate industry data provider, expects rents for all of Long Island to increase an average of 3.2 percent this year, compared with a 2.6 percent rise in 2018.
Indeed, it’s shaping up to be another solid year for the rental sector across the board: after 2018 saw year-over-year growth in the rental sector top 3 percent nationwide, Yardi Matrix predicts that the prolonged market cycle will continue through 2019, with rents forecast to rise at a rate of 2.8 percent, marking another year of consistent improvement.
Rising construction costs
Returning to the subject of construction, it’s fair to argue that rising costs in this all-important industry have the potential to impact the outlook for multifamily — a concern shared by 48 percent of respondents to our survey, who identified them as the biggest challenge facing this segment in 2019.
A booming market (especially in New York City) is making it harder to find good labor, which is also getting more expensive, especially for projects with a bond-financing component. That fact, combined with the escalating cost of buying goods from China thanks to a spate of new tariffs, has some developers thinking twice before jumping into the multifamily pool.
That said, the rate at which buildings are going up shows no sign of slowing down.
In New York City, according to the New York Building Congress’ 2018-2020 Construction Outlook Report, construction spending hit an all-time high of $61.8 billion in 2018 and construction employment increased for the seventh consecutive year, surpassing 150,000 jobs for the second year in a row.
The report, issued late last year, notes that New York City is in the midst of its second and most robust building boom of the 21st century, experiencing continued growth in residential development, as well as a significant expansion in public capital investment. The report forecasts the amount of new housing produced in the city between 2018 and 2020 to reach 60,000 units, averaging 20,000 units each year. Though this forecast is down from 27,800 in 2017, it is above the average from the previous decade.
Nationally, roughly 300,000 units are expected to come on line this year, an annual volume that we’ve now seen for several consecutive years. Although rents will be tested in some metro areas by spates of deliveries, recent experience has shown that supply should be absorbed by demand.
Interest rate predictions
Predictions regarding interest rates are also playing into market trends. According to our survey, 29 percent of respondents cited rising interest rates as the biggest driver for sellers this year. Meanwhile, almost an equal amount — 28 percent — named continuing low rates (despite marginal rises) as the biggest driver for buyers in 2019.
And while almost all the experts predicted in their 2019 outlooks that rates would rise this year, so far we’ve seen the exact opposite happen, a trend that shows no sign of slowing. Between January and March 2019, the 30-year fixed mortgage rate fell to 4.4 percent, the lowest point in over 13 months. On April 1, the average 30-year fixed-mortgage rate was 4.08 percent, down nine basis points since the same time the week prior. We’ve recently had some loans close at 40 basis points, or 0.4 percent, below where they would have in January, which is a big savings. Clearly, the sales slowdown we’ve seen so far this year hasn’t been due to rising rates, but other factors.
In New York, for example, concerns about a tightening regulatory environment — namely, uncertainty around rent regulation laws — have some buyers taking a wait-and-see attitude. These laws protect over 1 million renter households in New York City and Westchester, Nassau and Rockland counties, and are vital for low-income New Yorkers, more of whom live in rent-regulated apartments than in subsidized and public housing combined.
Ultimately, despite an array of complicating issues, as our survey illustrates, the outlook for the multifamily segment looks bright. Any potential downside scenarios will likely be outweighed by the aforementioned, can’t-miss combination cited in our survey as the biggest positives for multifamily this year: strong fundamentals, continued job growth and plenty of capital at the ready.
There’s no question that investors remain keen on commercial real estate — and as the economic cycle ages, they are increasingly moving their money to safer asset types. This translates to more dollars migrating into multifamily, a sector that’s enjoyed a solid run for nearly a decade. The key fundamentals that have propelled the multifamily sector in the past — favorable demographic trends, a burgeoning job market and the growth in renter households — should continue to do so for the foreseeable future.
By Lou Rosado, New York Market Manager, Capital One Commercial Real Estate