[REN #698] Multifamily Housing Forecast in 2019

Picture of apartment building for Real Estate News for Investors Podcast Episode #698

The multifamily market is looking good this year as rental demand grows. Fannie Mae’s 2019 Multifamily Market Outlook shows the number of units coming online this year will peak at 453,000. That’s much higher than the previous two years. It says, positive job growth is one of the factors driving up demand, but investors need to keep an eye on individual markets. (1)

Fannie Mae’s director of economics, Kim Betancourt, says that Millennials are flooding the rental market, and pushing up demand for apartments. We’ve heard that a growing number of Millennials are buying homes, but many more are renting. Their homeownership rate is running about 8% lower than Gen Xers and Baby Boomers for the same age range. What that means for today’s market is Millennials will need rentals, and plenty of them.

We’ve also seen very strong job growth recently as the economy recovered and White House policies encouraged job creation. That’s expected to slow down somewhat this year. Betancourt’s team expects to see job growth of 1% in 2019. Based on that figure, the demand for multifamily units would be between 250,000 and 370,000. As I mentioned, her team anticipates 453,000 new units, nationally.

In order to judge whether there’s a balance between supply and demand in various metros, you must look at where these units are going and whether job growth is strong enough to support them. Betancourt says, most of the units are going to 10 to 12 major metros and that some of those cities will fall short on jobs. She says, “Some metros will be winners and some losers in terms of multifamily demand over the next 12 to 18 months.”

Metros that Could Be Overbuilt

New York is among the metros that could be over built. The city is getting the most new multifamily units this year with a job growth rate that’s less than the national forecast.

The report shows, 38,000 units will come online this year but with a .9% job growth rate, the city will only need 21,000 new units. That’s leaves a surplus of about 17,000 units. It’s not clear if those job growth numbers take the Amazon HQ2 pull-out into consideration.

Boston is also expected to have an oversupply this year. The Fannie Mae report says 14,000 units will come online this year. With an expected job growth rate of 1.1%, the city will only need about 9,500 units. There are other examples in the report, as well, but let’s turn to metros where supply is needed because of strong job growth.

Metros with Strong Job Growth

At the top of Fannie Mae’s list for higher-than-expected job growth are several Florida metros. Orlando is number one on the list for job growth at more than 3%. Las Vegas, Austin, and Phoenix are next. Jacksonville, Florida will see close to 2.5% job growth. Houston is also strong, along with Dallas. Tampa comes in at more than 2%. So does Raleigh, North Carolina and Miami.

So let’s take a look at those Florida metros. Betancourt says, job growth in 2019 is similar to 2018 where supply has been keeping up with anticipated demand. She says, “Based on the amount of expected job growth in metros such as Orlando and, to a lesser extent, Jacksonville, supply and demand are somewhat in balance looking ahead over the next 12 to 18 months.”

Miami is the exception. The report says, Miami is getting 11,000 new units this year, but that job growth will only produce a need for about half that many. In this case, the imbalance may not be a negative because Miami attracts so many foreign investors.

Las Vegas is another good example of “undersupply.” It has an expected job growth rate of 3.1% this year. That will create the need for at least 6,500 new units, but only about 2,200 are in the pipeline.

Uneven National Demand

Betancourt says, investors need to keep their eye on demand because it’s not evenly distributed. Some metros are seeing slower rent growth and a higher number of vacancies because they are overbuilt, but let’s look at the national picture.

Rent growth in 2018 was above average at 2.75%. It was also above the 2.2% rate of inflation for November of 2018 which is good for investors. Betancourt says, there’s been an above-average rent growth since 2011 and it’s only been since 2017 that it dropped below 3%. She’s expecting another year of positive rent growth for 2019 — between 2% and 2.5%.

Vacancy rates have also been below average, so an increase in vacancy rates could bring them in line with past averages. Betancourt says, “The vacancy rate is expected to return to more historical levels and then remain fairly stable further out into the forecast, due to ongoing favorable future job growth and demographic projections.” She says the historical average is about 6%. Her team is expecting it to get close to that mark by the end of the year.

Investor Interest in Multi-Families

Investor interest in multi-families remains strong. Betancourt cited a recent survey by the National Real Estate Investor that shows only a slight drop in interest for multi-families. The multifamily sector got a 7.7 score on a scale of 1 to 10 for 2018. That’s not far below the 8.0 reading for 2014. 41% also said they planned on buying more multifamilies, and 44% said they planned to hold on to what they have. Just 14% said they were planning to sell.

As for cap rates, Betancourt says, they’ve been in the mid- to low-5% range for two years now. She says, “It seems unlikely that cap rates will compress any further. But that doesn’t mean they will skyrocket either.” She expects them to rise slightly but remain below 6%.

Overall, she expects the multifamily market to remain positive.

(1) Fannie Mae’s 2019 Multifamily Market Outlook

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