5 multifamily investing predictions and expectations for 2020, and the disruptions to keep abreast of in the multifamily investing field.
By Vinney Chopra and Jon Roosen
The market for multifamily properties is continuously changing. In the light 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 go with the flow will 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 investing field. For that, they will have to be aware of these disruptions and how they are going to affect the profitability and sustainability of their investment portfolios.
You don’t have to look for a fortuneteller to get a good glimpse of the future of the multifamily investing market. You only need to view the trends that will shape the investment market. As we close another year and welcome the 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. Fear of a market correction
Market correction or no market correction?
It is very difficult to say when the next recession will be, but it has been a big buzzword lately among the media and investors.
Recent interest rate cuts might have stopped a recession, or a slowdown due to fear, from hitting in 2020. This has been the longest bull market in U.S. history.
Many on Wall Street are wondering if this long run is on its last leg or mustering a second wind. However, there are still expectations that the U.S. economy and GDP growth could slow next year. Investors are starting to hedge against this increased risk. And there are other various notable issues ahead in 2020 that also will create higher levels of uncertainty, such as the upcoming presidential elections, and trade conflicts.
As most investors are treading with caution as they move into the New Year, many are still seeing strong opportunity when using sound fundamentals when purchasing apartments. In our case we are closing on our deals with a lower Loan to Value Ratio (LTV) to hedge against a correction, and also having strong value-play built into the business plan. With a looming market correction, it’s important to not overleverage, and to have plenty of cash on hand if one does hit.
2. Rent control in 2020
The slowing economy and the fear of a recession are not the only fears of investors in 2020.
The issue of rent control has quickly become a top concern. Rent regulations have been instituted in a few major markets recently, and many more markets are considering this control to try and combat rising rental housing costs. States like New York, California, and Oregon are all implementing this control. Illinois and Washington State are on the list next for possible legislation.
On January 1, 2020, California law will allow only for a five percent increase, plus the local rate of inflation, per year. This law will expire in 2030 unless lawmakers vote to extend it. In New York’s metro area there has been a 9.2 percent decrease in multifamily investment, which is partly believed to be caused by the implementation of the new rent-control regulations.
Many housing economists agree that rent control is not the solution, that building more housing is a better answer to the problem.
3. Catering to a millennial and baby boomer market
As we move further into 2020, the millennial and baby boomer markets for multifamily will continue to expand.
Millennials today are searching for more affordability and portability, and they want accessibility to such things as entertainment and local experiences. Urban housing prices are skyrocketing in many popular cities, causing this shift for more affordable housing.
Many millennials are coming out of college with record-high student loans; adding a mortgage to that could easily surpass 50 percent of one’s income. So they avoid homebuying, which is helping to lead this shift. Home ownership of millennials is very low compared to other generations; they view buying a home as a long-term goal, and see their priority now as lifestyle. Along with affordability and portability, millennials are favoring things in our communities such as smart home features (Nest thermostats and USB outlets), white-glove services such as valet trash, lavish swimming pools and outside eating areas, and hip cyber cafes.
Another trend to look for in 2020 is the downsizing of the baby boomer generation into multifamily homes.
A study conducted by Fannie Mae estimated that more than 14 million baby boomers will end their home ownership by 2036, a 42 percent increase from the previous decade.
One study estimated that thousands of this demographic are coming into retirement daily, and are looking to downsize. They will have challenges; the Insured Retirement Institute estimates that 45 percent of baby boomers have no retirement savings. Leaving work for them will mean a drastic lifestyle adjustment and a need for more affordable housing.
According to the NMHC (National Multifamily Housing Council) tabulations of U.S. Census Data, 73 million baby boomers in the United States accounted for 58.6 percent of the increase in renter households between 2006 and 2016. With the expanding bubble of aging Americans, this number is expected to increase even further. The demand for senior living is increasing with the increase of baby boomers downsizing. We believe this trend will continue for the next 10 years, giving us a strong market in the senior living multifamily units.
4. Immigration and multifamily investing
By 2024, immigration is expected to surpass internal population growth for the first time, according to Hoyt Advisory Services Research.
Why is this important? It’s because immigrant families are more likely to rent than a native-born American. As you can see in the graph below, immigration is at an all-time high; this is great news for multifamily investing.
5. Demand for new apartments will soften
Post-recession in 2009, multifamily has become a larger piece of the overall new housing market with multifamily construction peaking in 2015 and 2016. While 2018 and 2019 paced well – even with a potential market correction on many minds – we believe we will see a slowdown on new construction in 2020. As shown in the chart here, there was a considerable drop in multifamily permits as the recession hit.
Summary of five 2020 multifamily investing predictions
As we enter 2020, even with these factors, we believe multifamily housing will remain strong and will still be a strong investment for investors who use sound fundamentals.
According to the Harvard Joint Center for Housing, State of the Nation’s Housing, 2019, approximately 75 percent of renters would like to become homeowners at some point.
This being said, homeownership rates have been stagnant and are not likely to return to levels seen during the previous housing boom. Millennials are entering the housing market in a time where student debt is a major problem, housing affordability is low, and lending criteria is more stringent.
When you pair this with their lifestyle factors of delaying marriage and choosing experiences over saving, it is very likely more millennials will remain renters for longer than previous generations. If and when a market correction comes, this will cause an increase in the need for affordable housing, and many will look to multifamily.
Another factor that will help multifamily investments are the aging of baby boomers, many becoming empty nesters, which is also contributing to the increase of older renters.
Read Vinney’s predictions from last year:
About the author:
Vinney has been a professional Fundraising Consultant and Motivational Speaker for over 35 years. He has given over 10,000 exciting speeches and seminars on Fundraising, Positive Thinking, Enthusiasm, Goal Setting, Balanced Living, and has been involved in Business Coaching. He travels and gives live presentations and webinars on Wealth Building. Creating Wealth with Multifamily Investing, Value-Add Win/Win Negotiations, Emerging Markets, Market Cycles, Economic Funding, Commercial Properties Analysis, Due Diligence, investing in Multifamily and the Art of Raising Private Money. You can reach Vinney by Texting the word “Syndication” to 47-47-47 or email at email@example.com to learn from his proven techniques and lectures through his educational academies- MultifamilySyndicationAcademy.com and MultifamilyAcademy.com. For more information, visit VinneyChopra.com, and MoneilMultifamilyFund.com.