We sat down with Americas Head of Multifamily Research, Jeanette Rice, to discuss her top multifamily markets to watch this year. Jeanette touches on what market attributes investors should look for when considering their next investment and market attributes that are not as favorable.
Jeannette, one of your latest reports highlights some of your favorite markets in 2019. Could you share some of your favorites and the reasoning behind them?
Sure, I love talking about my favorite markets because they are ones that are choosing higher rent growth than most, property returns are good, and strong demand. I actually have a lot so you may have to pull me back – I’ll just talk about five. We’ll start with Phoenix. Phoenix has been doing quite well for some time as it has strong supply and demand. They are absorbing a lot more. Phoenix has become a leader for population and employment growth. It is now the 11th largest metro in the country. In two years, it will move to 10th largest. It’s balanced and doing very well, not oversupplying like it had previously back in the 90s, which many people remember.
Among my other favorites includes Las Vegas, Orlando, and Tampa. Las Vegas slowly came back to the party after getting hit very hard by the economy in the last recession, but the economic population growth is back on fire which allows the multifamily market to perform well. Orlando and Tampa are doing well in the economy as well. They both have population growth and their multifamily markets have done exceptionally well. Orlando is also building a lot, so I’m beginning to watch the construction side, but still a stellar performance. Tampa as well, it’s just an hour and a half down the highway and has done very well. Rent growth now is one of the top in the country and it’s positioned to continue over the next several years.
Another one of my favorite markets is the Inland Empire. The Inland Empire is part of the whole Southern California region that suffered a lot during the last recession, similar to Las Vegas, so very little multifamily has been built there. However, the economy is back on fire, it’s doing well and what a lot of people forget is that it’s a huge economy. It’s part of Southern California and by itself has a population of 4.5 million, so there’s a lot of deep housing demand there. It’s rent growth is also quite favorable and should continue to do very well.
I think a lot of our readers would assume your top markets would include the ones we hear about all the time – Los Angeles, San Francisco, etc. Would you say that we’re seeing a trend in investors inclination to do business in smaller, tertiary markets?
Great question. Investment continues in the gateway and less notable markets, and for two different reasons. The gateway markets still offer a lot of opportunities and of course you get scale, especially for foreign buyers who need to put out a lot of money at once. You can’t get that in smaller markets, but some of the smaller markets are very attractive and offer a little bit of a yield premium so slightly higher cap rates, which investors like. If the fundamentals are strong, and there are other markets outside of the ones I mentioned that are doing well, then they are attractive.
If you divide up the cities and the country, you have your gateway markets, then you have your next tier markets. Phoenix. Really large markets, but they don’t price at the same level as gateway markets in terms of cap rates and dollars per unit, so they’re cheaper if you will. So, you have to watch the cycle of the quotes there, but they also have really strong demand. So, Phoenix, Atlanta, Dallas, and so on kind of fit into that second tier and there is a lot of investment capital coming into those markets.
Would top markets like Los Angeles and San Francisco fall under the markets you would proceed with caution on? Can you touch on some of the markets investors may want to think twice about?
I’ll answer those two questions separately. I do like the opportunity in both Northern California and Southern California. In Northern California, San Francisco and Santa Fe are the outperformers. There’s a lot of supply that is coming out of the ground right now in Oakland, so Oakland is positioned to have a short-term softness because that supply will bring rent growth down, but I believe they’ll get through that quickly, within the next 12 months or 18 months. The Bay Area is still on fire and the economy on apartment demand is still strong, so I do like the Bay Area, you just need to have the money to get in the door. Southern California is also a market I like. Construction has picked up a lot in the urban core of LA and some of the other urban cores, but it’s so relatively hard to build in those areas. So in Downtown LA the housing needs are not being met causing new supply and that’s helping the market a lot. It’s doing quite well, and I suspect that to continue. I believe any activity in California is favorable.
Markets I would avoid, there are none I would outright avoid. Of course, us real estate people always say that, but there’s a good deal in every bad market. There are some markets that have really gotten ahead of themselves, typically in the urban cores, and probably anyone reading this has heard these examples, but it’s worth noting. Seattle, Portland, and Dallas, where I am based, is a phenomenal market where we have built a lot over the last six years, and we’re still absorbing that. New York is another and as hard as it is hard to imagine that New York has built too much supply over the last seven years New York has added a very large amount of supply, all high end, and just in the boroughs of Brooklyn, Queens, Long Island City, and of course Manhattan. So, there are pockets of overbuilding in the urban cores. When I say “overbuilding”, it’s not long-term overbuilding, it’s short term and to lease up the properties the owners are having to give away a month free to two months free, sometimes even more in terms of concessions. So, that’s where I would show caution. It’s not so much a market story, it’s a sub-market story.
To close, what would be the main attributes of a market that investors should look for before investing.
Well at a metro level, I prefer dynamic-metropolitan area. You want to see some growth, it doesn’t have to be top of the ranks, but you do want to see some growth and business vitality to bring new people into the communities. You also want to have employment growth and population growth. The sub-markets can be really varied. It can be urban-markets, it can be suburban sub-markets, which are doing better right now. Basically, all kinds of sub-markets have opportunities. Location still matters in the sense that you still need to have a property that people can find. If you can find a property that allows for the residents to walk to some of the area’s amenities, that’s even better. Most cities in the country, are still car oriented, but that doesn’t mean people want to drive an hour every time they leave their house, so shortening drive time and if there’s walkability to transportation or amenities that adds to the value of property. Those are some of the basics I would advise an investor to check off his or her list when considering a market.
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