Multifamily Housing Still Hitting Home Runs

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.

The Mighty Urban-Suburban Submarket

I have such fond memories of graduating from college. And soon after graduation, with what seemed like $2,500,000 in my pocket (more like $2,500), I moved in with six of my close friends in Lincoln Park, Chicago. We crammed into a small apartment, along with our framed diplomas, and enjoyed the finer parts of being 22 and living in the city. Nighttime softball leagues. Weekend flag-football games. Volleyball on the beach. We didn’t have a care in the world and any thoughts of the future were sometime between that immediate moment and the upcoming weekend.

I was also lucky enough to be spending this time with my then girlfriend, now wife, Jennifer. Over the following few years I moved into a few different apartments using annual leases as my time to try new neighborhoods just north of Downtown Chicago. Then I decided to grow up and “pop the question” of marriage. Thankfully she said yes!

Then life happened.

After a few more years, we found ourselves playing fewer softball games. We found ourselves working longer hours and missing that weekend flag-football game because of an urgent deadline. And then we found ourselves expecting our first child. It was one of those moments when you look into the mirror and think – I’m getting so old!! Yes, 29 was really old, but it is all about perspective.

If we are not attending social events, not going to sporting events, not headed to the bars for that happy hour party on Thursday night: do we need to be in the city? And odds are this little person is going to grow up and need to play at the park – do we want to do that in the city? Our answers were “no” to almost every question, so we packed up the family truckster (Clark Griswald reference) and moved out to THE DREADED SUBURBS.

Now don’t get me wrong – we were a bit scared that we just traded a café in Lincoln Park for Bakers Square but we were very wrong. We found “city dining” in the suburbs and restaurants that we would say give any city restaurant a run for their money! We also found amazing schools for our son (who now has two other siblings), places to play and shorter commutes to work. We also found other couples in the exact same spot we were in and we all shared the transition together.

So why am I telling you this story? Well…I think the transition that Jennifer and I went through is more common than you would think. Young professionals often graduate from college and move into urban environments. They don’t want to buy a car but they do want to experience all that life has to offer. But they, just like we did, grow up and change the “value” they place on these parts of life and place greater value on things such as schools, commutes, taxes and even access to grocery stores!

With millennials making up a greater and greater portion of the workforce, employers are more and more attentive to this “value” transition as young professionals go from being 22 and care-free to 36 and pushing a stroller.

Today, we have what we’re calling “urban-suburban” submarkets. These markets provide an urban-like live-work-play environment, with abundant retail, office and housing options, and plenty of employment opportunities. They are often walkable, with public transportation access, or planned public transit projects, and amenities like entertainment and recreational offerings, restaurants and grocery stores. And while much ado has been made about the death of the suburban office market, it’s these suburbs – the urban-suburban markets – that are poised to capture tenant demand.

Tenants and employees do often prefer office locations in walkable areas with nearby housing, retail and entertainment options – as well as convenient transportation access. This will not change. Yet, the reality is that most Americans live in suburban areas and not the urban cores where these kinds of workplace dynamics are most common. And while the media and popular culture may lead you to believe that all millennials are currently enjoying city life (or trying to), the reality is only 30 percent of them actually live within urban areas. And of those who do, many of them will move to the suburbs once they have kids like I did. Employers are doing everything they can to attract and retain talent. If the talent is in the suburbs, so too, will be the employers.

Occupiers and investors alike have a great opportunity to take advantage of big-city living at small-town prices. Office rents in emerging urban-suburban submarkets – places like Glendale outside of Los Angeles or the Central Perimeter in Atlanta – were 23.5 percent below rents in the broader downtown market as of Q1 2017. In established urban-suburban submarkets – places like the New Jersey Waterfront and Santa Monica – rents were 11.1 percent below rents in the broader downtown market. Similarly, the vacancy rate for emerging urban-suburban submarkets was 15.3 percent as of Q1 2017, compared with 13.8 percent for established urban-suburban submarkets and 12.8 percent for the broader downtown market.

Established urban-suburban submarkets offer investors a relatively low-risk alternative to downtown office space, as fundamentals in these submarkets already outperform the suburbs overall and in many metros, rival the CBD. Alternatively, emerging urban-suburban markets offer those with longer-term strategies an opportunity to secure space in up-and-coming areas while there are still options to choose from and purchase prices are more affordable.

Get ‘em before they get too hot.

For more on the suburban office market, check out CBRE’s new research report.

By Scott Marshall, executive managing director, Advisory & Transaction Services, Investor Leasing, CBRE.

Quiet Giants

As the multifamily sector has progressed in this cycle, a few market dynamics have taken center stage: the supply pipeline, rental affordability and the emergence of what we call the “quiet giants”—suburban multifamily markets.

Supply Challenge

Supply will be the most prominent near-term challenge for the U.S. multifamily market. Completions outpaced demand in 2016 for the first time since the recession, and we expect the same in 2017. These two years will likely be the peak of this development cycle, and 2018 should bring noticeably fewer deliveries.

Although market conditions remained healthy in 2016, strong supply numbers have affected markets across the U.S., moderating rent growth and reversing the downward movement in vacancy. These trends are expected to continue through 2017, with annual rent growth projected to slip to 1.2% and vacancy expected to rise 80 bps to 5.5%.

Figure 1: U.S. Multifamily Outlook
Source: CBRE Research, CBRE Econometric Advisors; Q3 2016.

Recent development activity in American cities has reshaped the landscapes of many established infill markets and carved out new upscale neighborhoods in urban cores. These trends have helped to enhance urban livability and provide new opportunities for millennials, empty nesters and others.

However, urban infill neighborhoods are also the areas with the highest concentrations of development—those that will experience the greatest impact from supply, with rent growth rates that are markedly slower than metro averages.
Suburban markets are generally less affected by strong supply trends, while Class B and C multifamily communities that do not compete with the high-end and high-priced new product will perform relatively well in 2017.

How Much More Can Tenants Afford?

As the trend in high-end development continues to rise nationwide, renters’ budgets are feeling the squeeze and landlords—especially those in gateway markets—are asking “How much more can our tenants afford?”

Figure 2: Twenty of the Nation’s Most Expensive Rental Markets


Source: CBRE Research, CBRE Econometric Advisors; Q3 2016.

Half of renter-occupied households in the U.S. are now cost-burdened, according to the National Low Income Housing Coalition. That is, they spend more than 30% of their household income on rent—and the numbers are worsening. Half of those households are now considered severely cost-burdened, spending more than half of their income on rent.

Our research also shows that the least-affordable markets in 2011 have become increasingly unaffordable in the years since. For the assets built over that period, fundamentals have slowed considerably, with properties built since 2011 consistently experiencing lower rent growth and occupancy and higher concessions than any cohort of older buildings.

Suburban Growth

The 2014 American Community Survey of the U.S. Census (the most recently available annual data) shows that 2.8 million people moved from the suburbs to urban cores that year, while 4.6 million people moved from urban cores to suburbs. The trend was consistent across age cohorts, levels of educational attainment and professions.

While more people are leaving urban cores for suburbs than vice versa, many of them remain partial to the amenities of urban life and are helping create dense, quasi-urban enclaves that offer the qualities of downtowns—things like access to public transportation, high walkability, shopping, restaurants and bikeable commutes—without the high rents of downtown.

Broad-based migration to the suburbs has helped fuel strong rent and occupancy growth in suburban apartment markets, particularly in recent years. The percentage of markets with annual suburban rent growth exceeding their respective urban rates by more than 100 bps has consistently increased—from 22% in Q2 2012 to 63% in Q3 2016*.  For most of the past two years, the suburbs have significantly outperformed urban cores in more than half of these markets—a pattern that we haven’t seen in the past.

Figure 3: Percentage of Markets with >100 BPS Suburban vs. Urban Growth Spread
Source: CBRE Research, CBRE Econometric Advisors; Q3 2016.

With strong development pipelines squarely focused on downtown Class A product, lack of affordability is expected to remain a challenge for the overall apartment market, especially in the more urban areas. As such, the shift toward the suburbs is projected to continue, and suburban apartment markets will likely continue to perform well relative to urban cores.

*CBRE Econometric Advisors tracks 51 markets that have both urban and suburban apartment submarkets.

By Matt Vance, Quinn Eddins and Jeanette Rice, CBRE Research

CBRE’s 2017 U.S. Market Outlook previews the factors that will influence commercial real estate in the year ahead. To read the full report click here.

Millennial Myth Buster: young Americans DO like the suburbs

For the past several years, conventional wisdom has held that city-loving millennials are flocking to urban cores and will remain there in such numbers that the American suburbs, already well past their prime, can only experience further steady decline. As is often the case, though, the real story is more nuanced; census and CBRE market data show the suburbs are not dead and that the millennial love for downtown environments is not absolute. And all of this has implications for commercial real estate market fundamentals, investment and development.

The most recent available annual data (2014) show that 2.8 million people moved from the suburbs to cities that year; however, 4.6 million did the opposite.1 Since this runs contrary to the prevailing narrative about urbanization, it’s worth digging into the data to see what’s behind these numbers.

There are many ways to look at domestic migration——age, education and profession are all useful in breaking it down. In recent years, media stories have frequently focused on the role of millennials——those born between 1980 and 1995, roughly——in driving the resurgence of downtown areas. The focus on this generation was not unwarranted; millennials are now the largest age group in the country2 and make up the largest segment of the U.S. workforce.3 It is fair to say, however, that census data disagree with the media on where millennials actually live and where they have been moving to.Millennials in the Suburbs 1

Approximately 30% of millennials live within urban areas.4 The other 70% do not appear to be rushing to move downtown: In 2014, 529,000 people between the ages of 25 and 29 moved from cities to the suburbs, while only 426,000 moved in the opposite direction. For younger millennials aged between 20 and 24, the flow’s direction was even more pronounced, with 721,000 moving out of cities for the suburbs and 554,000 leaving the suburbs to pursue life in the city. It’s true that some of those moving to the suburbs were returning to childhood rooms or basements in their parents’ homes, but the migration trend still holds: not every millennial can or wants to live downtown.

Among the oldest millennials and the tail end of Gen X, negative net migration was even greater: 1.2 million people aged 30 to 44 moved from cities to suburbs, while 540,000 did the reverse. And what about the ‘‘silver tsunami’’ of boomers and retirees? Census data show a similar trend, though less pronounced. In fact, for every age group tracked by the Census Bureau, more people left cities for the suburbs than did the opposite. The pattern also holds across levels of educational attainment and by profession.5

Of course, one year does not make a trend——but analysis of the recent past suggests that media stories and observations from certain high-profile cities have likely propped up the narrative. Census data simply do not support it. In fact, in 2014, the U.S. was less urban than it had been in 2000.6 Even in the post-recession years——when many asserted that millennials were flocking to cities for employment opportunities——more people were leaving cities for the suburbs than the reverse.7

The remarkable discrepancy between population data and the prevailing narrative raises questions about the preferences of young people in the U.S. What do they want? Simply put: space and an urban feel. One recent survey showed that 81% of young people (defined as millennials and those born in the late 70s) want three bedrooms or more in their residence. Their responses regarding geography reflected this preference: two-thirds of respondents stated a desire to live in the suburbs, while only one in ten wanted to live in a city center.8 Such findings are corroborated by the results of another survey, in which nearly two-thirds of millennial-aged respondents self-identified as suburbanites or rural people.9

Still, millennials have a reputation for appreciating the perks of urban life, such as easy access to public transportation, shops, restaurants and offices.10 This does not necessarily translate into demand for downtown real estate, however. Suburbs too, can develop in ways that appeal to younger demographics, by incorporating elements of urban life in suburban areas. This is occurring in metros across the country.11 New terms have even been coined to describe quasi-urban areas in the suburbs——among them, ‘‘hipsturbia’’ and ‘‘urban burbs.’’

It’s also worth examining office data, to see whether it offers any insight with regard to employment trends. After all, it is possible that the labor economy has been healthier in urban cores than in the suburbs, which might contribute to the popular migration narrative, despite its lack of support from population data.

Looking at office market data——where employment in tech, financial services and other professional services (office-using employment) drives demand——the story appears to be mixed at best. Downtown office markets nationwide have significantly outperformed their suburban counterparts less than one-third of the time since the year 2000, judging by their share of net absorption relative to their share of net rentable area (NRA).

Millennials in the Suburbs 2

In the years following the Great Recession, the story was largely the same——only perhaps a little more mixed, with downtown markets outperforming suburban markets in two of the years between 2010 and 2015. During one of these——2011——population data were also somewhat supportive of the urban renaissance story.

During the first half of 2016, across markets where the comparison can be made, almost two-thirds of suburban office markets outperformed their local downtown counterparts (share of net absorption vs. share of NRA). In essence, CBRE office market data describe patterns similar to the story told by census data, survey results and other analysis: generally speaking, suburbs are outperforming urban cores.Millennials in the Suburbs 3

The data make it clear that America will not condense into its urban cores anytime soon. To the contrary, there are indications that the suburbs are alive and well. Still, one of the most important things to note from all of this is that there is no single narrative that applies across all U.S. property markets.

To be sure, there are downtown markets across the country that have outperformed——and will continue to outperform, in some cases——suburban markets. In the broadest sense, though, the urban renaissance story got a bit ahead of itself. There is potential for many millennial stereotypes to play out in the quasi-urban environments found in the suburbs, however. Driven by family formation and the desire for affordability and urban amenities, the urbanization of burbs will have implications for the future of property markets.

Looking ahead, the evolution of commercial real estate markets will transcend the traditional lines of downtown vs. suburban, or millennial vs. boomer. Each market has its own dynamics that play out on various levels and in unique ways. While there is some truth to the idea of the resurgent urban core, it is also fair to say that the death of the suburbs and millennials’ love of cities have been greatly exaggerated.

Remember, even at the end of How I Met Your Mother, they moved to the suburbs!


By Darin Mellott, Director, Research and Analysis, CBRE

1 U.S. Census Bureau. Geographical Mobility: 2013 to 2014. 2015.
2 Pew Research Center. Millennials overtake Baby Boomers as America’s largest generation. 2016.
3 Pew Research Center. Millennials surpass Gen Xers as the largest generation in the U.S. labor force. 2015.
4 Forbes. Millennial Boomtowns: Where The Generation Is Clustering (It’s Not Downtown). 2014
5 U.S. Census Bureau. Geographical Mobility: 2013 to 2014. 2015.
6 Jed Kolko. Urban Revival? Not For Most Americans. 2016.
7 Los Angeles Daily News. Americans still prefer suburbs over cities: Joel Kotkin and Wendell Cox. 2016.
8 Wall Street Journal. Generation Y Prefers Suburban Home Over City Condo. 2015.
9 Urban Land Institute. Gen Y and Housing: What They Want and Where They Want it. 2015.
10 Nielsen. Millennials Prefer Cities To Suburbs, Subways to Driveways. 2014.
11 Gizmodo. Millennials Will Live in Cities Unlike Anything We’ve Ever Seen Before. 2016.