SILICON VALLEY, CA – Ten-X, the nation’s leading online real estate marketplace, released its latest U.S. Apartment Market Outlook, including the top five ‘Buy’ and ‘Sell’ markets for multifamily real estate assets.
The long-term forecast reveals the sector remains strong after years of booming growth, but may now be primed for a slowdown after far surpassing its prior cyclical peak.
The forecast indicates Sacramento, Calif., Las Vegas, Atlanta, Phoenix and Dallas are the top markets in which investors should consider buying multifamily assets. These regions are being fueled by robust local economies, with a steady influx of new jobs attracting residents still eager to forgo home ownership for the opportunity to rent in a large metropolis.
San Francisco, New York City, San Jose, Calif., Miami and Milwaukee are the top markets where Ten-X Research estimates market conditions might cause multifamily investors to consider selling their properties. These cities have generally been at the forefront of the massive shift toward urban centers over the last decade, and are now coping with rising vacancies and flattening rents as new supply continues flooding the market.
The Ten-X Research report notes that a record 260,000 completions were reported in 2016, with another roughly 250,000 expected to arrive this year. While absorption remains strong, this massive infusion of supply will drive vacancies as high as 5.6 percent over the course of 2017 before climbing above 6 percent during a modeled cyclical downturn beginning in 2019.
The mild uptick has already begun to slow rent growth, as evidenced by a 0.7 percent seasonally adjusted increase in the third quarter – the slowest quarterly gain since 2013. Ten-X Research predicts rents will continue to grow by roughly 3 percent per year until 2018, before leveling off to roughly 1 percent gains in the two-year modeled downturn.
Ten-X also notes that home ownership, which has been declining sharply for years, has begun to show signs of stabilization. While demand for apartments should remain largely unaffected, absorption rates could slow should the trend begin to gain steam. Overall economic indicators, including steady employment growth and rising wages, may provide a boost to the market by pushing millennials saddled with student debt out of their parents’ homes and into the rental market.
“For years, the multifamily sector has been reveling in the spoils of a massive cultural shift toward urbanization and falling home ownership. As Americans continue to move to certain major cities in droves, developers have responded by making huge investments in those areas, flooding the market with new apartments,” said Ten-X Chief Economist Peter Muoio. “While many larger metros appear to have reached a critical mass of supply and are now seeing fundamentals begin to cool, a strong economy and more limited development continue to make multifamily an attractive bet for investors across the country.”
Effective rents were up 3.8 percent year-over-year in the third quarter, further extending their all-time peak, while strong absorption pushed nationwide vacancies down slightly to 4.3 percent. Cap rates showed a slight increase of 10 bps over the second quarter, moving to 4.9 percent.
Overall deal volume in the sector totaled $36.9 billion during the third quarter – an 8.1 percent increase from the same period in 2015.