Multifamily Trends in 2019: Important Updates for Multifamily Investors
As we glide through the second quarter of 2019, the multifamily investment and development market is still hot-- but there are a variety of trends that investors, developers, brokers, and other industry players should be aware of. In particular, U.S. rent prices are steadily increasing, though not as quickly as they have in the last two years, both baby boomers and millennials are moving into apartment developments, especially in urban areas. In addition, tenants, particularly younger ones, are craving new amenities and features, such as smart home technology, wellness amenities, and environmental sustainability.
National Rent Prices Continue to Increase
As of April 2019, national rent prices sat at $1,436, an approximate 3% increase from April 2018. Overall, Las Vegas saw the fastest rental growth in the U.S., with a nearly 9% increase from January 2018 to January 2019. Other markets with fast growing rents included Nashville, Phoenix, and Charleston, which all had 2018-2019 rental increases of between 7-8%. However, in the first quarter of 2019, cities with the fastest growing rents included Chicago, Tucson, Colorado Springs, and Milwaukee.
Right now, the most expensive apartment rental market in the country is Manhattan, with average monthly rents of $4,188, while the least expensive market, Wichita, Kansas, had average monthly rents of somewhat less than $650.
Baby Boomers and Millennials Move to Multifamily Developments
In 2019, the need for multifamily housing has never been higher; from 2012-2017, approximately 1 million new renter households were formed each year, creating a significant amount of demand in major markets throughout the United States. In many cities, new demand for apartments is being spurred by baby boomers moving out of their homes, as well as by millennials moving out of their parents homes, or, in some cases, moving from suburban areas to more attractive urban areas with a closer proximity to jobs and leisure activities. This trend has been encouraged by a strong job market and lower unemployment, especially among individuals ages 22-30.
International immigration is also factors into the increase in demand, as it’s estimated to be the source of more than half of all new population growth in upcoming years. The need for housing, in fact, is so high that in 2017, the National Multifamily Housing Council (NMHC) estimated that, by 2030, the United States would need 4.6 million new apartment units in order to keep up with demand. With demand so high, landlords are generally providing concessions to new tenants instead of slashing rental rates, as they might do in a period of lower demand. Despite this high demand, vacancy rates have risen, most likely due to the fact that high rents are pricing out a substantial part of the market.
Multifamily Vacancy Rates See a Slight Increase
As of the first quarter of 2019, the U.S. apartment vacancy rate was 4.8%, a slight increase from the 4.7% vacancy rate in the first quarter of 2018. Cities including Denver, Austin, Charleston, and Orlando saw some of the largest increases in vacancy rates, potentially due to a large influx in new development. In fact, the Multifamily Vacancy Index (MVI), a score created by the National Association of Home Builders (NAHB) rose to 48 from 45, where it sat in Q4 2018.
Apartment Renters Want More (and Better) Technology
Today, many aspects of smart home technology are still relatively novel, but, in several years, they will likely become must haves for any multifamily development. Currently, nearly half of millennials already have smart tech at home, with that number growing by the year. Some of the most popular smart home devices include smart thermostats, smart lighting, and smart door locks. Many of these devices can be controlled with cell phone apps, which makes it easy for homeowners to lock their doors or turn their lights off with a simple swipe of their screen.
While smart tech can certainly make an apartment stand out from the competition, investors and developers should be aware that these technologies can be challenging and expensive to implement, especially if are careful plan isn’t put into place. Integrating smart home tech into an apartment complex generally involves meticulously selecting the best tech options, as well as providing significant additional training for on-site employees and property managers. In addition, since the technology is changing so quickly, apartment owners and developers may worry that the smart home tech they purchase may be outdated just 1-2 years after it’s installed.
Health, Amenities and Transportation Considerations are Also Important to Renters
In addition to smart home technologies, health considerations are also becoming a priority, especially for younger renters and those with their eye on more expensive, class A properties. In the National Multifamily Housing Council’s 2018 Consumer Housing Insights Survey, more than 90% of renters wanted soundproof walls and a living environment that would help improve the quality of their sleep. However, tenants want more than just sleep quality; they want a variety of amenities that they feel will increase their overall quality of life.
Top amenities desired by renters include swimming pools, in-unit laundry, gyms, and spas. Most would prefer having utilities included in their rent, as well as perks such as WiFi, Internet TV access, keyless entry systems, and security cameras. As always, apartment location is key, and ride sharing services like Uber and Lyft have lead to a slight decrease in car use, meaning that apartment complexes may not need as many parking spots as they once did.
Finally, sustainability is also attractive to renters, with more than half of those surveyed by the NMHC saying they would be interested in living in a sustainable development, or, at the very least, one with energy-efficient appliances. While sustainable properties typically cost more to develop and build, they generally cost less to maintain due to utility savings, improving an owner’s NOI and the overall profitability of the property
The Multifamily Development Business is Still Booming (For Now)
Despite the very slight increase in vacancies, multifamily development is still progressing at a rapid pace. In 2018, a reported 244,400 apartment units were completed, just slightly less than 2017’s 247,500 units. An estimated 249,600 units will be coming online throughout 2019, though many believe that the rate of multifamily development will begin to cool off significantly after 2020. In fact, in Q1 2019, the Multifamily Production Index (MPI), a measure of market confidence among builders and developers, dropped 7 points, to 40, the lowest it’s been in several years. For reference, if the MPI is below 50, more respondents believe that the market is headed downward, while if it’s above 50, more respondents think that the market is headed upward.
The Need for Affordable Housing is Still Greater Than Ever
According to the National Low Income Housing Coalition, a non-profit advocacy group, there are only 37 low housing units for every 100 of low-income households in the United States (including those those near the federal poverty line or whom have 30 percent or less of their local area median income). This means that there is currently a shortage of 7 million units. While nearly 5 million American households receive some form of housing subsidy from the HUD Section 8 program, an estimated 22.3 million households currently require assistance, either due to a serious lack of affordability, poor housing conditions, or both.
This issue is only exacerbated by the fact that the vast majority of new apartment developments are more expensive Class A properties, which, in certain areas, may be unaffordable even for middle-class renters. In fact, of the approximately 1.4 million units that came online between 2009-2018, less than 3% (about 37,000) were class B units, while the other 97%+ were class A. Since Class A units can bring significantly higher rents for investors, affordable housing development is unlikely to increase unless significant changes are made to programs such as the aforementioned HUD Section 8 program and the Low Income Housing Tax Credit (LIHTC).
The LIHTC program, which provides a dollar-for-dollar tax credit for investors who place funds in affordable housing developments, has been credited with creating approximately 2.4 million affordable units since the program’s inception in 1986. Despite the effectiveness of these programs, President Trump’s 2020 budget actually plans to cut funding for HUD’s affordable housing programs, so little help can be expected from the federal government when it comes to addressing housing affordability issues.
Multifamily Investment Sales Continue to Grow
U.S.multifamily sales reached $36.4 billion in the first quarter of 2019, a more than 1% increase over Q1 2018. From Q1 2018 to Q1 2019, overall multifamily investment sales volume increased more than 8% to $175.2 billion. During Q1 2019, cap rates fell by 0.2% with an average cap rate of 5.39%. For the last two years, multifamily has been the number one sector in commercial real estate sales, and that looks unlikely to change in the near future. Top sales markets included Los Angeles, Dallas, and Manhattan.
In Q1 2019, multifamily sales in from international buyers increased to $14.7 billion, a more than 3% jump from 2017, with Canadian buyers responsible for nearly half of all international sales. Multifamily debt also grew, with overall outstanding debt increasing by $32.2 billion to $1.4 trillion total. So, while in some ways, the market may be peaking in 2019, most believe the market is healthy-- and multifamily investors, builders, and developers still have a lot to look forward to.