We sat down with Americas Head of Multifamily Research, Jeanette Rice, to discuss her top five apartment trends to watch in the second half of the year. Jeanette touches on the strength of workforce housing, supply and demand, and her projections for 2019.
Jeannette, you recently released the 2019 outlook report for the US Multifamily market. In that report, you outlined some trends to look out for this year, can you share your top 5?
Absolutely.The first and most important trend is multifamily demand will stay very strong in 2019. We’ve had stellar performances for the last several years. 2018 had the highest net absorption or our measure of demand since 2000. We’re looking at another very strong year for multifamily demand and that’s for all geographies and for all kinds of products.
We’re still seeing some of our younger households move into home ownership and I do believe home ownership will rise maybe half a point this year. It’s just demographics, we have a large millennial population, but movement is still slow to home ownership. Most people will continue to rent in multifamily that are already in multifamily, so I feel really positive about that particular aspect of the market.
Do you see home ownership becoming less of a challenge in a considerable way anytime soon? Half a point doesn’t seem too substantial.
Exactly. What’s going on behind the scenes is that housing costs have been rising and we’ve had average annual increases on the median sales price of about 6% since the recession. So even though rents have been rising as well, they’ve averaged about 3% over the last ten years. Housing is just getting more difficult to enter into. Survey after survey most millennials say they ultimately do want to buy a home, but the barrier to entry to too steep. The higher cost, the strict requirements, large down payments, the burden of student debt all play into their inability to save for home ownership.
On the other hand, many just don’t want to buy a house and they enjoy the urban living. It’s obvious why – over the last 10 years we’ve built gorgeous properties, wonderful new communities, so that’s promising. A lot of them want to stay in that environment at least until they have a couple of kids and then suburbia might look a little bit better
You mention all the development we’ve seen over the past few years, where do you see development in 2019?
From a market standpoint, many of our submarkets are building too much. From a broader picture of the multifamily market, we may not be building too much. We have pockets of softness because all the product we’ve built. Last year we almost reached the level of 2017 and in 2019, the total completion will reach a new peak for this cycle. Not for all of history, we’ve built more in the 70s and 80s, however for this cycle, we’ll reach a new peak.
What’s happening is that much of the new product that is now being built in the suburban markets, where it’s easier to be absorbed, it’s much broader and deeper. I worry a little bit about construction, of course it is my job to worry, but it’s not going to bring up or down vacancy rates. We’ll still see some growth in 2019.
What about small multifamily assets, in your report you mentioned that as a surprising bright spot for you. Can you speak to why that caught you off-guard and what investors are seeing there?
Sure, and thanks for asking about that. I’ll confess, throughout my entire career, I’ve had a little bit of institutional, or large property, bias and I never paid much attention to the small multifamily assets or their performance.
I was requested to do just that a few months ago and what I found was so exciting. Just how much has been invested in that area is staggering in terms of increases, it’s really growing. Behind that, interest and investment are really solid. So, small assets, 50 units or less, are typically older properties in neighborhoods that were/are being gentrified because they don’t have a lot of amenities like the newer properties we discussed earlier, and as a result more affordable. You have the terrific neighborhoods at a more manageable price point. It’s not surprising that the demand for this product is really growing.
Vacancy rates are below the broader market. I think vacancy rates are under four percent. Rent growth is solid and turnover in these properties are lower, which helps with the operations and reduces expenses. Overall a really solid part of the industry, a lot of capital available, that I don’t think in the past, has been readily available. The agencies and banks are certainly interested in this product as well.
It seems like workforce housing/smaller multifamily assets is the place to invest?
Jeannette – Yes, definitely work-force housing. Small assets come at all price points, some are for work-force housing and some at a higher price point. Workforce housing in general is very attractive these days. The investment community, not just product buyers but also institutional and even some foreign capital has been looking at and investing in work-force housing. It’s pretty simple from a market fundamentals perspective. We’re not building workforce housing, that’s very difficult, we never have. We’ve always built at the top of the market, but demand for workforce housing is very strong, so workforce housing is basically the housing that, households making between 60-100% of the area median income live. It doesn’t even have to be multifamily, but that of course is the focus of my research. These are your teachers and firemen, classic professions for folks that contribute to the community, have a below average income but need a good place to live.
Quality housing at a decent price is a huge problem. We’ve talked more broadly about affordability in the U.S. and that’s a different topic, but workforce housing, because of such strong demand and no new supply, low vacancy rates, and rent growth, will continue to perform well. – I don’t see that changing.
You mentioned foreign investors being interested in workforce housing as well and I know that influences the multifamily market. As a last point, can you touch on some of the off-shore capital that is interested and active in the multifamily market?
That’s a really exciting topic because I love talking about capital around the world and it’s been growing a lot. The Canadians have been investing in the U.S. forever and they are still the dominant investor. The Canadians and apartment REIT’s as well as pension funds. Other strong investors include Singapore and the Netherlands, they took the number two and three spots in 2018. All together there is about $16 billion invested by off shore capital. That’s direct investment and doesn’t include foreign capital coming in through equity funds or other vehicles. If you include some of these other avenues, then it’s probably double that.
Foreign capital was almost 10% of all capital invested in multifamily this year and even in countries that we don’t take up a large piece in the pie chart have a lot of interest because they’re talking to us every day. German and Asian capital are very interested in getting up to speed in the U.S. multifamily sector. In the case of Asia, they don’t really have a comparable market and that’s true for places like Australia as well. Australia hasn’t really invested that much yet. I expect to see that grow in the future. Japan is doing some development in the U.S. and that’s exciting as well to see that come in. We expect it to continue to grow for a variety of foreign investors.
Search available listings on CBRE Deal Flow.
Request a financing quote from CBRE Debt & Structured Finance.