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Analysts: The multifamily sector is hitting its peak

Multifamily has been the star of the commercial property sector for much of the post-recession recovery. The sector has beat expectations in 2018 in a number of ways, but 2019 in terms of origination volume and loan performance could represent the peak. Analysts say the market's solid fundamentals, such as rental growth and low vacancy rates, will likely continue into 2019. 

“We are anticipating a bit of a plateauing of activity,” said Jamie Woodwell, vice president of commercial real estate research for the Mortgage Bankers Association during a recent interview. “So, we are still expecting to see strong overall levels of borrowing and lending, but probably not the same pace as the rate of growth we have seen the last couple of years.”

apartmnt(1)The multifamily market seems in no danger of falling on hard times anytime soon, however. 

“In general, what we are seeing across the U.S. is really lots of housing demand across the board,” Woodwell said.  “For single family, for multifamily, for homeownership, for rental, over the last year, the U.S. has added about 1.5 million additional households.”

Multifamily originations hit a record of $285 billion in 2017. MBA has forecast that overall multifamily originations will rise to $302 billion in 2018 and then jump again by 2 percent in 2019. 

 Fannie Mae, the second largest single financier of multifamily loans after Freddie Mac, is also forecasting a solid year for multifamily activity in 2019, roughly in line with 2017 and 2018.

“I think we are all in agreement that it is still going to be a fairly busy year, down maybe a little bit next year, but still I think a busy year because those fundamental drivers are still in place for multifamily, which is the demographics, the jobs and the household formations,” said Kim Betancourt, Fannie’s director of economics and multifamily research. She said millennial-age renters have kept demand up, which has in turn supported strong rental growth and the low vacancy rates.

“Millennials are still the big reason for a lot of these renter households that are forming,” she said. “They are getting the jobs. They are forming households. It is sort of a combination. We have got a lot of demand coming from that job growth, then there is just not enough supply on a national basis to meet demand.”

Multifamily originations tend to follow trends in sales. The outlook for large apartment properties valued over $2.5 million looks solid, according to Real Capital Analytics (RCA). Sales volume in the third quarter totaled $48.3 billion, up 14 percent year over year. Those numbers, however, were boosted significantly by Greystar's purchase of the student housing operator EdR, a $4.6 billion merger that was finalized in September. More telling of the trends are that single-asset sales have grown in 2018, and the volume is up significantly involving mid-rise and high-rise apartments. Notably, multifamily was also the only commercial asset class to post a double-digit growth in sales prices in the third quarter, at 10.7 percent annual growth, according to RCA.  

"Apartments are leading [in terms of] people’s desired investments," RCA's Senior Vice President Jim Costello said. "There is both a yield story and expectations for ongoing growth [in asset values]. They have both been showing steady performance.".

The national vacancy rate for apartments still suggests a tight market that favors landlords, even though builders are expected to add 280,000 new apartment units in 2018, according to the commercial intelligence tracking company Reis. The vacancy rate stood at 4.8 percent as of September, which was up from the record low of 4.1 percent in the 2016, but still lower than the long-run average of 5.2 percent, Reis reported.

Rental growth this year also beat expectations, remaining in the range of 4.4 percent to 4.6 percent in 2018. Rents have cooled off from a height of 5.8 percent annual growth in 2015. Betancourt said rent growth would likely slow by the end of this year to a more normal range of around 3 percent and eventually fall back to the traditional annual growth of around 2 percent to 2.5 percent.

Betancourt said the large number of apartments under construction doesn't tell the entire story of the supply.

“There are pockets of a lot of supply and, if you are in the New York area, the D.C. area or San Francisco, you probably see a lot of cranes in the sky,” she said. “But that is not the case everywhere. As a matter of fact, much of the multifamily new supply is concentrated in about 10 metros.” Many of the new apartments that have opened also are upper-scale, she said, and there’s a shortage of affordable apartments. 

This story was revised from its original version to include information from Real Capital Analytics. 


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