How Does Multifamily Look Like in 2019?

If you're considering investing in a multifamily venture, or if you're already in the market, there are challenges and opportunities to watch for in the coming year. From rent trends to supply and cost factors, here's what to expect in 2019.

 Photo Credit.   DJC Oregon

Photo Credit. DJC Oregon

Multifamily real estate posted another exceptional year in 2018. Whether judged by gains in property appreciation or income growth, multifamily fundamentals delivered. Mapping the year ahead, investors are positioning themselves now as the market signals that dynamic changes are underway.

Three primary impacts will move the multifamily market in 2019, including pressure from volatile financial markets, a growing housing supply and emerging development risks.

Rising Interest Rates (The 800-Pound Gorilla)

Debt pricing looms as the largest multifamily market mover in the coming year. In the first half of October alone, an equities sell-off dropped the Dow Jones almost 7% and pushed the 10-year Treasury yield to a high-water mark of +75 basis points for the year. That rate, if left unchanged, would rank as the third-largest increase since 2000. On the public side, the Fed is widely expected to continue bumping up the federal funds rate through 2019 at least.

Private market behavior and federal monetary policy both point to rising interest rates. And more so than any other investment, real estate class and multifamily asset pricing is tied to debt pricing.

Inexpensive debt capital and plenty of equity seeking placement in the multifamily market have supported rising property values in recent years. But when the cost of borrowing goes up, cap rates must move correspondingly as investments don’t make financial sense until sale prices come down. It’s a pricing fundamental that has always existed, but one that sellers never want to concede. In fact, the seller’s market has run so long that owners now faced with downward pricing adjustments don’t want to budge.

The bottom line, with that inherent price pressure in mind, 2019 is looking more like a buyer’s market. Attractive multifamily acquisitions will be captured by buyers who secure assets that are “right priced” to account for rising interest rates.

Supply Balance or Supply Glut?

Multifamily operating dynamics remained strong this year. Rising rents paired with high occupancies produced income growth that generally outpaced operating expense increases. Those robust operations and attractive financing delivered cash flows. But new supply in many markets has now caught up with or surpassed demand.

Occupancy rates and rent growth prove this out in markets such as Seattle and Boston, where red-hot rent growth over the last five years made them real estate darlings and lured developers to benefit from a supply imbalance. Now those markets, and even secondary markets like Nashville and Milwaukee, are working through multifamily deliveries that put the brakes on rent growth to levels between 0% and 1.5% on a year-over-year Q3-2018 basis, according to Zillow. That compares with annualized rent increases from 2015 to 2017 near 7% in Seattle and 5% in Boston and Nashville.

The potential multifamily supply and demand imbalance is still playing out across the country. “We’re seeing a lot of rental markets peaking and coming down,” says Neil Schimmel, President and CEO of Investors Management Group.

Despite favorable rental housing demand tailwinds, a growing number of industry insiders question whether demand will keep pace to support the lease-up of new apartments scheduled for delivery in the near term. According to Schimmel, “Some of the primary markets are dealing with rising vacancies and softer rents. But we still have a lot of confidence in the supply/demand balance and cost-of-living value in cities like Charlotte and Atlanta.”

Rent growth across markets is becoming increasingly spotty, as this construction cycle slows, and housing demand still fuels impressive rent growth in some metros.

The bottom line, multifamily buyers are wise to evaluate how apartment deliveries and pending development pipelines in their area could impact asset values and operations for them locally and in markets across the country.

Article Resource: Kiplinger