Multifamily in a Nutshell

All the Q2 multifamily market facts and stats are in our newly-released U.S. Multifamily Figures report, but here are the 11 key characteristics of the multifamily market – what you need to know at mid-year 2018.

 

  1. The sector remains healthy, even at this mature point of the market and investment cycle. Multifamily ownership and investment are still attractive.

 

  1. Multifamily demand is very high. Demand is healthy across all geographies (metros, submarkets), across all types of product (garden, high-rise) and across all qualities of communities (brand new, 1970s vintage). Even with millennials slowly moving into homeownership, favorable cyclical and secular forces are keeping most current residents in multifamily housing as well as attracting new residents.

 

  1. The property market cycle peaked in 2015, yet vacancy has only inched up a modest amount since. Rent growth is moderate to be sure, but is positive (for the eighth year in a row) and has picked up modestly from a year ago.

 

  1. The investment cycle peaked in 2016, but buying activity remains high. The sector’s diverse set of capital sources shows a sustained appetite for multifamily acquisitions, and actual dollars spent in the sector are up from last year.

 

  1. Cap rates are firm. The sustained investment interest in the sector and actual buying activity have kept cap rates steady so far in 2018 (see S. Cap Rate Survey H1 2018 Advance Review).  Expectations are that they will remain firm through the second half of the year.

 

  1. Developers are as active as ever, and construction is not yet slowing despite expectations to the contrary. The robust construction pipeline will result in sustained high deliveries over the next few years. Some of the new supply will further exacerbate some urban core submarkets already saturated with new product, but more of the new deliveries are suburban bound where supply and demand are generally in balance.

 

  1. Suburban, Class B and C product continue to outperform urban and Class A. Capital (including institutional and cross-border) is very attracted to assets in these categories, with value-add acquisitions remaining one of the key strategies. This remains an excellent strategy given that moderately-priced rentals are very much in demand; however, significant rent increases will be harder to obtain in some markets and submarkets. (And on the topic of affordability and policy, over the next several months we’ll be hearing a lot more about the expected repeal of Costa Hawkins in California and its implications.)

 

  1. Core asset investment appears to be picking up also. The high price (low cap rates) of value-add buying is bringing some capital back to core. The core strategy makes sense for longer-term holders where underwriting is less sensitive to the current flat rent trend line for much (but not all) of the high-end product.

 

  1. Whatever the strategy, capital is still willing to accept lower returns for multifamily investment than the sector has historically offered. The trade-off is some combination of income growth, expectation of higher returns over the long term, investment opportunity (product availability) and better returns than alternative investment options (other real estate product types, other non-real estate asset classes and/or non-U.S. geographies).

 

  1. The outlook remains generally favorable. Looking ahead, all owners and investors need to keep an eye on new supply, which will continue to impact performance in various pockets. Yet, while the U.S. economy continues to expand, there is nothing on the horizon that should significantly derail the generally positive market dynamics.

 

  1. Multifamily fared better than the other property sectors during the last recession and is positioned to do the same with the next recession given secular changes in how and where Americans live.

 

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

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