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Multifamily market’s strength marked by regional and demographic variations

by  | Corporate
Posted:     Updated: Dec 29, 2015  15:48 ET
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Multifamily is multifaceted. Although the multifamily, or apartment, sector remains one of the strongest investment segments of the commercial real estate business, and analysts predict the sector will remain strong in 2016, there are plenty of variations in the market, depending on where you're doing business and the age and income-level of your renters.

Investors poured record amounts into the multifamily sector in 2015. Through November, transactions involving multifamily properties totaled $125.6 billion, eclipsing 2014's 12-month total of $113.2 billion, which surpassed 2007 as the highest-volume year on record, according to Multifamily Executive.

commercial construction

There's plenty of new construction too, according to the U.S. Census Bureau, which says the number of multifamily units under construction in November was 18 percent higher than a year earlier.

That spate of buying and building is the result of strong annual rent growth. Average annual rent increases reached a nine-year high of 5.2 percent in third-quarter 2015, according to AXIOMetrics, an apartment-market analytics company. Rents are approaching a seven-year run of continual quarterly increases, dating to the official end of the Great Recession in mid-2009.

Healthy occupancy rates have become the norm, too. The average vacancy rate has stayed at about 4.2 percent since early 2013, even as new multifamily construction heated up, according to a report from Reis Inc. In second-quarter 2015, for instance, 46,000 new units were completed in the U.S. — at the same time that apartment demand increased by 44,000 units.

Demographics also have worked in favor of multifamily investors over the past half-decade. Members of the millennial generation (now in their 20s and 30s) have been buying homes at historically low rates and opting instead for apartment living (or, continuing to live with their parents). They're joined by an increasing number of baby-boomers cashing-in on high property values and turning from owning to renting as they enter or approach retirement.

Other influences

The numbers add up to a strong multifamily sector, although prospects differ by region and market segments, and outside economic influences are expected to buffet the industry over the short to medium term.

The most obvious of those influences is interest rates, which are already inching upward after December's much-anticipated increase in the Federal Funds Rate. A Colliers report points out that the average return on multifamily investments has, for the past six years, consistently been about 3.7 percent higher than the interest rates for long-term U.S. Treasury bills. As interest rates rise, that gap could narrow and make multifamily investments less attractive.

But, Colliers says, interest-rate concerns are often overblown by investors who "incorrectly assume that the interest rate is the single most important factor in real estate valuation." More significant factors, the report says, are the size of rate increases and overall wage and income levels in the U.S.

Slow wage growth — pegged at a 1.6 percent annual rate in November — is already squeezing renters who, on average, devote 30 percent of their income to rent, according to a study by Zillow. That's the highest percentage since analysts began tracking the number in 1979, and compares to an average of about 24 percent of income spent on rent between 1995 and 2000.

Tepid income growth has made it more difficult for landlords to raise rents for less-affluent tenants, according to a Reis report in the Scotsman Guide/Commercial Edition. Rents in the priciest apartments were increasing at a 5.6 percent annual rate in mid-2015, compared to an average increase of 3.2 percent in less expensive apartments.

Reis forecasts that as the job market continues to strengthen, personal income will rise at a faster clip, and landlords will find it easier to raise rents at less pricey apartments. That, in turn, could make it more difficult for tenants to save for a new-home downpayment, increasing the odds that they will remain renters.

Geographic factors

Just as there are marked differences between high-end and low-end rentals, there are significant market-to-market geographical differences. Multifamily operators in the Western U.S., for instance, have had more success raising rents than those in other parts of the country.

Portland, Oregon, registered a year-over-year average annual rent increase of 14.3 percent in the past third quarter, the largest average increase in the country. Five California markets were in the top 10, including No. 3, San Francisco (11.3 percent); No. 4, Sacramento (10 percent); No. 5, San Jose (9.3 percent); No. 8, San Diego (8.4 percent); and No. 10, Riverside (7.7 percent), according to AXIOMetrics.

Nationwide, average annual rent growth in the Western U.S. was 8.4 percent, compared to 4.7 percent in Southern states, 4.5 percent in the Northeast, and 3.6 percent in the Midwest.

There's another type of segmentation that will have a long-term effect on the multifamily market. With the long-anticipated graying of America, senior housing has drawn increased investor interest, especially since the end of the recession.

Senior housing currently makes up about 10 percent of the U.S. apartment market, but that proportion will grow significantly beginning around 2026 , as baby boomers — the demographic currently moving from houses to apartments — reach their 80s and begin moving again, to assisted-living and independent-living properties.

The demographic and geographic factors make a difference but, overall, forecasters expect the multifamily market to remain fairly healthy. Reis predicts that vacancy rates will increase a bit, but stay low, at about 5 percent over the next five years, and that millennials will remain renters, primarily, for the next decade.


Bill Lewis is editor of Scotsman Guide Commercial Edition. Reach him at (800) 297-6061 or

Topics: Commercial economy | Commercial lending
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Multifamily market’s strength marked by regional and demographic variations

by Scotsman Guide Media | Corporate
Posted: Dec 29, 2015  15:44 ET    Updated: Dec 29, 2015  15:48 ET

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