Resilient Multifamily Market Sees Rising Occupancies, Rents

Michael Tucker mtucker@mba.org

September 19, 2018


Buoyed by a strong economy and continued healthy demand, the average U.S. apartment rent rose $2 in August to $1,412, up 3.1 percent year-over-year, reported Yardi Matrix, Santa Barbara, Calif.

Rents have grown steadily all year, reaching new highs seven months in a row, the Yardi Matrix Multifamily Monthly report said.

"The sector's performance is highlighted by rising occupancy rates in the face of robust supply growth," Yardi said. Since January, the occupancy rate for stabilized properties has increased 25 basis points, which the firm called particularly impressive because 2018 is on pace for a third straight year with nearly 300,000 new apartment unit deliveries.

Growth continues to be led by metros in the south and west, which occupy the top nine spots in the ranking, Yardi said.

How much time is left in the commercial real estate cycle is an open question. "There are few modern examples of cycles that last more than eight years, so every quarter the market goes without a downturn seems to be tempting fate in the eyes of many observers," Yardi said. But the multifamily market shows no signs of nearing the end of its cycle. "While it might be overstating the case to say that the sector is picking up steam, August rent data indicates that deceleration no longer seems to be an accurate term for the state of the market," the report said.

Marcus & Millichap, Calabasas, Calif., said last December's tax reform gave the already-extended growth cycle a "shot in the arm," raising confidence among businesses and consumers alike. "For the multifamily sector, this has meant increased household formation and better-than-expected housing demand," the firm's Multifamily Investment Forecast said. "Vacancy rates dipped in the second quarter despite the steady delivery of new units, suggesting that this year could outperform expectations."

The Marcus & Millichap report noted a "unique convergence" that bodes well for the multifamily sector over the short- to medium-term. "The strong job market and elevated confidence have sparked an acceleration in the formation of households," the report said. "For years, a disproportionate number of millennials have resided in their parents' home, but the strong economy may finally be unraveling this trend."

At the same time, homeownership may be moving further away for millennials as a limited supply of entry-level homes, rising house prices and increasing mortgage rates all restrain first-time homebuyers, Marcus & Millichap said.

While the economic and demographic factors look good for the multifamily market at this point, some clouds are forming on the horizon, Marcus & Millichap said. "Rising interest rates and the prospect of a yield-curve inversion could dampen growth or even induce a recession within the next few years," the report said. "In addition, protectionist trade practices and a potential trade war could trigger accelerated inflation, weigh on growth and dramatically increase construction costs. It is uncertain how these trends will manifest, but they do warrant close monitoring by investors as the year progresses."

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