“Stable.” That’s the one word that encapsulates the anticipated state of the multifamily sector this year, according to Greg Willett, chief economist at RealPage, a Richardson, Texas-based firm which provides property management software solutions. That was also the sentiment expressed by other industry experts as well, when asked for their forecasts for the upcoming year. “The reality is multifamily going into 2018 is going to be a lot of the same,” says John Sebree, first vice president and national director of the national multi housing group at Marcus & Millichap, a real estate services firm. Here are those predictions broken down.
Class-A assets will remain attractive. In most markets, this sub-sector of multifamily will continue to be competitive, Willett notes, particularly in urban core and suburban settings. However, vacancy is also trending higher at luxury apartment buildings, which has not been the case for some time, according to Sebree, as most of the new product coming on-line fits within this category.
New deliveries may carry over into 2018. Some deliveries expected to take place last year have shifted into 2018, says Mark Culwell, managing director at Transwestern Development Company, a commercial real estate development firm. “I think deliveries have been extended beyond what most of us expected,” he notes. One reason for these extensions is a shortage of construction laborers, a challenge that has been exacerbated by the recovery of the single-family home segment, Culwell says. This may also lead to increased labor costs. “I don’t see anything to suggest we’re due some relief,” he adds.
Both vacancies and rents may continue to inch up. Demand has diminished slightly while supply has picked up—and vacancy rates have started to reflect that last year, says Peter Muoio, chief economist at Ten-X, an online real estate marketplace. “We think this trend will continue,” Muoio says. As for rent, last year they grew by 2.5 percent overall, Willett says. “We think that the 2018 number is between 2.5 and 3.0 percent, so again, not a drastic shift in momentum,” he notes. However, it will be important to watch just how much rents can be raised for workforce housing units, which have elevated levels of occupancy, as those tenants may not be able to afford big hikes, Sebree adds.
New product starts may moderate. Willett says construction starts is the biggest wildcard for this year. There’s a “general perception that we are going to have some slowdown, and we agree,” he notes. An underlying reason could be that it has become more difficult to find appropriately zoned land, as much has already been built to catch up with demand, Culwell says. “It’s become more of a challenge in urban markets to find those sites to put into production,” he notes.
The “flight to quality” will continue. Banks, private equity shops and other lenders are using more scrutiny when examining deals, which means fewer multifamily deals are getting done even though demand for rental units has not lessened, says J. David Heller, principal, president and CEO of development firm The NRP Group, in an email. “It means lessons learned in 2008-2009 are being applied and the industry is protected from overbuilding,” he writes.
Houston, Manhattan, Orlando, Fla., Philadelphia and San Jose, Calif. are markets to watch. RealPage anticipates that these five metros will perform well this year, Willett says. Meanwhile, the firm downgraded the anticipated performances of Austin, Texas, Brooklyn, N.Y., Charlotte, N.C., Dallas and Seattle.
The gap in affordable housing left by the U.S. Department of Housing and Urban Development will not close. This means that private investors can step up to provide units for low- to moderate-income families, as nothing is expected to change this year, says Ken Munkacy, senior managing director of Kingbird Properties, the real estate investment arm of Grupo Ferré Rangel, a Puerto Rico-based family office.