The current multifamily growth cycle still has “room to run” as rent growth is on target to exceed 2.5 percent for the seventh straight year, 300,000 units of new supply are coming online, and investor demand for U.S. apartments remains robust, says Yardi Matrix in their summer multifamily report for 2019.
“But will looming trade tensions, slowing global economic growth and an inverted Treasury yield spoil the party?” the company asks in the report.
Here is what the current multifamily growth cycle shows:
At mid-year 2019, the multifamily market is continuing its strong fundamental performance with prospects for the next few years remaining bullish. Rent growth has stabilized at just over 3 percent, and we expect a 2.6 percent increase for the full year—the seventh straight year above the 2.5 percent long-term average.
- Rent growth is led by metros in the Southwest and South with fast-growing economies and relatively affordable housing, but strong gains are being recorded in most metros across the country. The strong economy and employment market, along with demographic and social factors, are creating healthy demand for apartments.
- Although growth remains steady, there are concerns about the U.S. economy as the strong and steady growth trajectory of the last few years has begun to show some cracks. Trade tensions, slowing global growth and an inverted Treasury yield curve may be starting to outweigh healthy employment, steady energy prices and continued growth of the technology industry.
- Supply nationally has increased by about 300,000 units annually, and this is expected to continue for another couple of years. There are 600,000 units under construction but, with the construction labor shortage, the units are taking longer from start to finish.
- Capital markets are supportive of a healthy market. Investor demand for U.S. apartments is robust, as the sector is seen as a safe haven in an increasingly uncertain environment. The 100-basis point drop in the 10-year Treasury yield also restores a high premium over borrowing costs. Demand for debt is so high that agency lenders are burning through their allocations and other lenders are picking up any slack.
The likelihood of a recession in the next two years is small, the report says
“The saving grace for the U.S. economy continues to be the labor market. New job formation, low unemployment and steadily increasing wages provide stability and support to an otherwise unsettled economic situation,” Yardi Matrix says in the report.
“As of June, U.S. employers have added jobs in 105 consecutive months, by far the longest expansion in the post-WWII era. Unemployment sits near 50-year lows at 3.7% and, with such a significant number of job openings, candidates that in previous cycles remained on the sidelines are being pulled into the labor force. Minorities, older workers and individuals with criminal records are entering the labor market in large quantities, as employers cannot be as selective or discriminatory as they have been in years past.
“All indications point to additional employment growth, as workforce participation increases and job formation remains hot,” the report says.
Multifamily rent growth trends
Multifamily rent growth got out of the gate slowly in 2019, leading the industry to wonder if the above-average-increase streak would end in 2019. But since rent growth resumed in the second quarter, the answer seems to be “no.”
Through mid-year, rents are up 2.6 percent year-to-date and 3.3 percent year-over-year. The market now looks poised to further extend what has been an already protracted cycle, with rent growth unwavering in a large swath of markets.
As of midyear, only a handful of markets saw increases of 2.5 percent or less. We expect normal seasonal leveling of rent growth in the second half but a full-year increase of 2.6 percent, or 10 basis points above the 2.5 percent long-term average.
By class, apartments aimed at the middle and lower end of the spectrum continue to lead in rent growth.
Demand should remain strong for the foreseeable future due to the healthy employment market and demographic trends, according to the report.
Previous report: Yardi Matrix Report Forecasts A Solid Multifamily Housing Market
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