The market for multifamily properties is continuously changing. On account of major political, social, and economic developments, investors will have to look at the bigger picture. Adaptation is the key to success amid an uncertain landscape. Whether to resist or flow with the current will still depend on what investors want to achieve in the foreseeable future.
It’s because of these fundamental reasons that investors will have to keep themselves abreast of significant disruptions in the multifamily field. For that, they will have to be aware of these disruptions and how they are going to impact the profitability and sustainability of their investment portfolios.
You don’t have to look for a fortune teller to get a good glimpse of the future of the multifamily market. You only need to view the trends that will shape the investment market. As we close another year and welcome a new one, let us focus on what to expect from the multifamily market and look at the trends that really matter in the long run.
1. High rent situation
Zillow notes that rents across the United States will continue to follow an upward trajectory as demand continues to rise. This would lead to a sellers’ market in which investors that had held on to their assets for quite some time will find it more practical to sell and reinvest elsewhere.
Still, the rates will vary from one location to another. The supply and demand for rental housing is also a significant determiner of rental prices. Along these lines, it helps to know where to invest and emerging markets remain as great locations for buying multifamily assets.
2. High Interest Rates
US News relates in an article, RISING INTEREST RATES are having a ripple effect across the housing market as the Federal Reserve increases borrowing costs.
The Fed raised rates again in December and it is predicted to do so twice in 2019. The effect of the Fed’s rate hikes is seen in mortgage rates, which are about 100 basis points higher compared to a year ago at nearly 4.9 percent for a 30-year fixed rate mortgage.
October housing starts data also fell short of expectations. Homebuilder sentiment is falling amid rising mortgage rates and stronger home prices, according to the most recent monthly survey by the National Association of Home Builders/Wells Fargo Housing Market Index. The survey data show that builder confidence dropped eight points to 60 this month. It was 72 at the beginning of the year.
Experts say some areas of real estate and certain regions may hold up better than others with rising interest rates.
Essex Realty Group in Chicago President Doug Imber says that rising rates are the topic of conversation and concern for real estate investors, but the context for why rates are rising matters just as much as the direction.
“Rates go up for different reasons, and the reason that they’re going up now, thankfully, is because we have a very strong economy and the Fed is trying to be mindful of inflation,” he says.
3. Solid conditions for multifamily and commercial assets
Without a doubt, the multifamily and commercial sectors will be big winners in 2019 on account of various positive factors that are impacting these markets. Here’s an excerpt on a US News report by Debbie Carlson:
Imber says the economy’s strength is reflected in outperforming real estate sectors. Industrial real estate distribution centers and office warehouse have been doing well.
“Generally, office (space) is having a period of lower vacancy and good rent growth,” he says.
Multifamily units, such as apartment buildings, have had a period of solid growth, and it may continue if mortgage rates continue to rise and home prices remain strong. Those two factors raise the barrier to individual homeownership, and the apartment owner is the beneficiary.
“People stay as renters for an extra year or two while they save up more money for down payments (for homebuying),” Imber says. “It’s not just the rates are higher, but if I’m making X amount of dollars in salary, I don’t qualify (for cheaper rates), so I have more money to put down.”
The one caveat to multifamily housing is that supply is starting to increase, which could limit how much landlords can raise rents, he says.
Investors who use real estate investment trusts should be able to withstand higher rates, says Mauricio Gruener, founder of GFG Capital in Miami.
He says throughout the previous Fed rate hike cycles, REITs have held up well. Since 1994, REITs have outperformed stocks in every tightening cycle except last year. REITs averaged a return of 16 percent relative to the 10 percent return of stocks during the 23-year time frame between 1994 and 2017, says Gruener, who was citing data that compared the FTSE Nareit Equity REITS index with the Russell 3000 index.
4. Focus on emerging markets
Possibly the best part of any multifamily year-end outlook is of list of emerging markets that are attractive to investors. Indeed, considering the need to build a highly profitable portfolio, investors should buy at the right time and in the right place.
Let’s look at a few cities where better cash flow is expected:
Atlanta, GA
For some quite some time, the Atlanta multifamily market has remained robust. With good population growth and affordability, the city is a haven for first-time investors who are out to build their multifamily portfolios. In fact, as new constructions continue to pick up, we are seeing good indicators of a healthy jobs market in this city.
Orlando & Jacksonville, FL
Going deeper south, there’s Orlando which has always been a primary destination for cash flow-hungry investors. Even though occupancy rates remain high, we can expect new apartment units to offset the discrepancies. We can see the same situation throughout Southern Florida, where investors are leaning away from condominiums and focusing heavily on apartments due to a steady rise in demand for quite some time.
Raleigh, NC
Another southern city in our list of emerging markets for 2019, Raleigh offers more than just historical attractions. For one, the city has had a strong showing in the jobs department. Unemployment was pegged at 3.6 percent and investors remain confident that joblessness will further decline in the coming year with the passage of a new bill that will pull tax rates down and spur the creation of more jobs throughout the country.
Louisville, KY
Despite challenges to rent growth, multifamily markets in the Midwest are not clipping on new property constructions. Taking Louisville as a case in point, demand for rental housing in the city continues to surpass supply. Against this backdrop, along with a decline in the unemployment rate, more rental developments are definitely in the offing.
Fort Worth, TX
The Texas rental market isn’t showing signs of caving in. No doubt, northern Texas is seeing favorable conditions for the multifamily sector. As investments come flooding in and job growth is on an uptrend, there remains firm confidence over the fact that Fort Worth is performing well beyond expectations in both newly constructed and value-add investment properties. Emerging from the gains of 2018, competition will definitely boil over as the New Year approaches with optimism over the economy’s performance.
There are other areas where the job markets are strong and predicted to also do well; for example, Los Angeles, Inland areas like Fresno, Provo, Utah, Las Vegas and Phoenix, AZ. Investors are advised to do comprehensive demographic and Job growth researches before entering any market.
5. Catering towards a millennial and baby-boomer market
The future of the multifamily sector will depend not only on economic policies, but also on the needs of the two most important demographic segments: the millennials and baby-boomers.
While it’s true that more millennials are buying single-family homes, they will have to go through a renting phase before they can fully transition into full-fledged homeowners. Nevertheless, younger sub-segments of the millennial market will definitely start out as apartment renters while older segments gradually transition to single-family ownership. Sure enough, a large swathe of this market will define emerging markets and reverberate throughout the entire playing field.
Along with millennials, baby-boomers are also expected to steer the multifamily market into high-opportunity areas. Many of them will be retiring and instead of buying single-family homes, they are moving into rental complexes to pursue scaled-down lifestyles.
6. The rise of workforce housing
Aside from these projected developments in the multifamily sector, investors will also have to explore emerging niches. For sure, 2019 will see segments of the market create high-value opportunities along the lines of value-add investments.
One such segment that’s sure to grow is the workforce housing market. According to HousingWire Editor Ben Lane, workforce housing – which caters to low to middle-income earners – is expected to outperform other niches in the multifamily sector. This is on account of sluggish wage growth and low inventory of housing units. These factors will definitely push demand for workforce housing further, amid a rise of people who are renting out of necessity. This, in turn, will result in new constructions and the rehabilitation of existing supply that multifamily investors should leverage in order to secure better cash flow.
Sure enough, several markets are already benefitting from the strength of the workforce housing sector. Rent growth has been fairly stable, but it’s also expected to accelerate for the better part of 2019 in areas where there is strong demand among wage-earners. Investors will only have to accommodate new renters with revitalized apartment complexes through value-adding components and repositioning.
7. Emergence of opportunity zones
New areas of oppportunity will begin to emerge favoring the multifamily sector. The National Multifamily Housing Council puts it:
Treasury in October 2018 proposed favorable Opportunity Zone regulations that adopted many NMHC/NAA priorities that should enable multifamily investors and developers to get projects off the ground. As the regulations do not address every issue, NMHC/NAA will work with policymakers to make additional changes, including further reducing the threshold for property improvements that rehabilitation projects must meet for Opportunity Zone benefits.
Enacted as part of tax reform legislation in 2017, Opportunity Zones are designed to provide tax incentives for investments in distressed communities. Under the new program, Governors have designated over 8,700 qualified low-income census tracts nationwide as Opportunity Zones. Up to 25 percent of a state’s qualified census tracts may qualify as Opportunity Zones, with each state having to designate a minimum of 25 Zones
Now that Opportunity Zones have been designated, real estate developers and others may establish Opportunity Funds that will be eligible for two tax incentives:
First, taxpayers may defer capital gains that are reinvested in Opportunity Funds to the earlier of the date an investment in an Opportunity Fund is disposed of or December 31, 2026. Notably, gains deferred for five years are eligible for a 10 percent basis step up, while gains deferred for seven years are eligible for an additional five percent basis step up.
Second, post-acquisition capital gains on investments held in Opportunity Funds for at least 10 years may be permanently excluded from income.
Bottom Line
Of course, we won’t know for sure if these expectations will hold up. But what can be gleaned from these observations is a need to address uncertainty, which has always been a prevailing condition in the multifamily property market. Nonetheless, these offer an apt starting point for investors who want to face 2019 with little to no apprehension.