As we review 3rd party forecast reports, attend conferences listening to real estate economists and discuss with our multifamily operators what they are seeing in the market, the 2019 apartment market for investors and operators still looks attractive. Although certainly as in any market and one that has had long legs to the upside like this one, one needs to continue to be selective on markets and projects that make sense and continue to be conservative in assumptions and expectations.
Here’s some of the main things experts are seeing to support a continued healthy market. These are observations, forecasts or trends so keep in mind anything can happen such as another potential government shutdown (2.0) if prolonged would impact the renter and owner community.
1) Reduced Housing Stocks – the U.S. remains under housed. We have more households forming all the time and less housing units to offer these folks. Current estimates are that we need 2.7M more units just to catch up. In 2007 before the crash we had a surplus but that is not happening now. New construction is also down 5.6% year over year.
2) Increased Rental Demand – demographics are still behind this asset class. Younger workers are finding higher housing prices a deterrent to home ownership and want the flexibility to move to where jobs are more frequently than the past. Boomers are retiring, downsizing and looking for lock and leave, high amenity, low hassle apartments as an option.
3) Affordability gap – the average affordability gap in the U.S. between the cost of home payments and renting an apartment is $339 still favoring renting in many markets and moving higher. The markets that are higher than that gap would be a more favored market to own apartment buildings (increased demand) as it’s a more attractive proposition to rent versus buy.
4) MF asset pricing – although we see at the top (class A new construction) prices pulling back in select areas where there was overbuilding especially in the central business district, we don’t see that happening in class B/C assets where the value-add operators are focused on. Demand continues from investors of this asset class.
5) Cap rates and yield spreads – are expected to remain essentially flat. Increasing cap rates reduce commercial property values but as the economy appears slowing and fed is signaling a slower pace of interest hikes in 2019 the fear of much higher capital rates doesn’t seem in the cards for now.
Some of the top MF markets to invest in 2019:
1) Markets with strong rent growths and landlord friendly
- Florida (Orlando, Jacksonville and Tampa)
- Arizona (Phoenix, Tucson)
- Las Vegas, Nashville
2) Benefiting from the Amazon effect – cities that were runners – up are seeing big investments from other companies that were following that research
- Dallas, Atlanta, Denver
- Austin (Apple in Dec announced 5K-10K jobs added and a $1B expansion).
3) Markets with Top Employment Growth
- Texas (Dallas, Houston)
- Phoenix, Atlanta