It’s the time of year when many of us become re-engaged with major league baseball via the playoffs (go Astros!), root for the home football team (the Cowboys, well there’s still hope) AND begin to think about multifamily market performance in the coming year.
All outlooks begin with the economy. CBRE Econometric Advisors (CBRE EA) projects the 2020 GDP at 1.5%. Positive, but it will feel slow compared to 2018’s 2.9% and 2019’s expected 2.3%
Multifamily demand is also fueled by secular trends such as demographics and lifestyle dynamics. The availability, appeal and cost of alternative housing options—such as single-family homeownership—also impact multifamily demand. The secular and housing alternatives drivers in 2020 will be largely unchanged from recent years.
However, millennials are aging, and the vast majority are now in traditional homebuying stages of their lives. Many millennial households will move or consider moving into homeownership, but that path will remain challenging given high home prices and the mismatch between what millennials can afford and what’s available.
For the 66 largest U.S. multifamily markets, CBRE predicts 2020 net absorption to reach approximately 200,000 units. The total is about 25% lower than the 2019 estimate of 271,000 units, but still fairly healthy.
Development activity continues at a steady pace. In 2020, completions are likely to total about 280,000 units, only marginally under the estimated 297,000 units to be delivered in 2019. Evidence of the sustained level of deliveries in 2020 comes from several sources.
CBRE EA’s under-construction total for August was 612,000 units which is only slightly below the March 2019 cyclical peak of 630,000 units. Year-to-date through August, construction starts were up only 0.2% year-over-year according to the Census Bureau, but multifamily permitting activity was up 4.2%.
Fortunately, development activity is becoming more widely dispersed geographically within metropolitan areas and more varied by type of structure (i.e., more suburban and more garden). This dispersion allows for a better match with market demand and gives a “breather” to many of the urban core submarkets which had become temporarily saturated.
Nationally, with demand at 200,000 units and new supply at 280,000, vacancy rates are positioned to rise. From the estimated 2019 annual average of 4.3%, vacancy is likely to climb 40 bps to 4.7%, reversing the downward trend experienced over the past two years.
Even with this increase, vacancy will still remain under the long-term average of 5.1%. Rent growth is likely to ease down from 2019’s estimated annual average of 3.2% to 2.4% in 2020, just below the long-term average of 2.6%.
Next year’s mild cooling in multifamily’s market performance should not diminish the appeal of the sector, and investment should remain very active.
Multifamily housing is playing a larger role in the country’s broader housing environment, and the long-term trends of inadequate single-family and multifamily housing construction given household growth and obsolescence, urban densification and rising costs of urban living will continue to strongly support multifamily housing over the long term.
By Jeanette Rice, Americas Head of Multifamily Research, CBRE.