The success of the country’s multifamily market
- Richard Murillo
- Apr 25, 2018
- 6 min read
Who’s Got the Power? The success of the country’s multifamily market can be largely attributed to the shifting priorities and spending habits of Americans in a post-recession environment. The fiscal goals of each living generation are widely disparate, so which group has been the most instrumental in causing the uptick in demand for multifamily properties? Research shows that demand for multi-family housing is led primarily by the Generation Z and Millennial age segments, in addition to downsizing Baby Boomers. These groups are attracted to may aspects of renting vs. buying that afford them more flexibility. Renting can be particularly good for people with a smaller portfolio of investments, because they can use the equity from the sale of their property and grow it for a more comfortable retirement. Generation Z: Born: 1995-2012, Age in 2018: 6-23 Generation Z, defined as those born between 1995 and 2012, already comprises 21 percent of the U.S. population—66.3 million people—a small portion of whom are beginning to enter the housing market as renters. Approximately 4 in 5 (82 percent) of Generation Z renters live with someone else. Generation Z renters are twice as likely to be living with roommates, friends, and family members than all renters from all generations.
Millennials: Born: 1981 to 1996, Age in 2018: 22-37 Millennials, who at this point were expected to be well established on the property ladder and trading up from their starter homes, are instead still saving for their first down payment. Millennials (the newest generation with spending power) came of age post-9/11, and its members are now entering their prime earning years. Many headlines proclaim this group is less inclined to home ownership than any previous generation. The popularity of sharing services like Uber, Airbnb and WeWork suggests a desire for freedom as well. This demographic started adulthood during one of the worst economic times in living memory, resulting in unprecedented amounts of debt. Understandably, these factors have discouraged them from saving money and making big purchases like cars or homes. 19 Million of current U.S. renters used to be homeowners.* One-quarter of those renters lost their homes as a result of the foreclosure crises, which is sure to leave a lasting effect on the home ownership rate
Generation X, Born: 1965-1980, Age in 2018: 38-53 Gen Xers were mostly in their 30s and early 40s when the housing crisis hit — just old enough to have bought a house. By 2009, many of them found themselves either underwater on their mortgage, or in foreclosure and completely forced out of their home. Gen X was in the wrong place at the wrong time, economically speaking, and in many cases the consequences of that continue. Baby Boomers, Born: 1946-1964, Age in 2018: 54-72 Baby Boomers and early retirees are renting while in between downsizing from one property to another. Today’s older Americans want flexibility to follow their children and grandchildren. THE ECONOMIC CRUNCH Student debt, a tight job market, and the inability to save for a down payment have kept many potential home buyers out of the market. “Credit markets are still extremely tight, and a lot of people don’t have the right credit score. With stricter lending terms than ever, some consumers aren’t even potential participants in the market. Student loan debt in the U.S. stands at a hefty $1.4+ trillion. It is the second leading form of debt in the United States behind mortgage debt. OTHER FACTORS? Economics isn’t all that drives consumers to rent. Some simply aren’t interested in owning a home. “The dream of owning a home isn’t as high of a priority on people’s list,” says Mark Wolf, CEO and founder of Irvine, Calif.–based AHV Communities, a developer that builds single-family rental communities in Texas. “Part of that is residual from the downturn, and part of that is that we’re a much more experience-driven society nowadays and are more portable. People don’t live in their house for 30 years anymore, and they move more for jobs, so the portability of a lease while still being able to enjoy the luxury of a home is a perfect combination.”
KEY TAKEAWAYS • One-third of all urban applications are for renters over age 60* • Baby Boomers and early retirees are renting while in between downsizing from one property to another • Student debt, a tight job market, and the inability to save for a down payment have kept many potential home buyers out of the market • Millennials do share the dream of home ownership, but many have had to delay that milestone investment • There has been a societal shift in the America Dream of home ownership with the priority lying more in short-term experiences with more flexibility DEMAND DRIVERS • Population growth • Rental household growth • Job growth • Cost of ow
MARKET DISCUSSION The U.S. multifamily market remains very dynamic, reaching a seven-year high in 2017. Challenges in multifamily demand include rising cost of land due to rise in demand, high construction costs and wages keeping up with elevating rent increases. VACANCY AND ABSORPTION Multifamily demand remained very strong in 2017, as evidenced by the 241,200 units absorbed over the year-the second-highest annual total during the recovery/expansion period. The Q4 vacancy of 4.9% was relatively low, but up marginally from a year ago. New deliveries remain at peak levels, with 265,900 units completed in 2017. RENT GROWTH AND NEW DEVELOPMENT Rent growth in all metros is expected to remain above the Federal Open Market Committee’s target inflationary rate of 2 percent, except for New York City and Washington, D.C. – two areas experiencing some of the highest levels of completions. Southern California (composed of San Diego, Los Angeles, Riverside, and Orange County) will also experience below-historical-average rent growth. Yardi Matrix’s monthly survey of 121 rental markets has recorded a $4 increase in the average U.S. apartment rent over the past month, up to another all-time high, of $1,217 for July. Rent growth is up 5.5% on a year-over-year basis, and occupancy rates have stabilized, at 96.0%, over the past several months, despite increased supply in many areas. The report attributes the increased demand for rental units to the trends of “consistent job growth, rising household formations, and the ongoing dip in homeownership” in the markets surveyed. Even though rents are high, the rate of rental growth slowed in July. Matrix Monthly attributes the slowdown to a recent trend of slower growth in the latter half of the year. The report found that some areas are seeing an increase in supply over demand or have otherwise exceeded the rate renters can afford. (Yardi Matrix expects a delivery of 300,000 new units in 2016, skewed mostly toward high-end renters.)
ORIGINATION & FINANCING RESULTS On the debt side, we expect the streak of multifamily origination volume growth will continue but the rate of growth will ease. Origination volume in 2016 came in higher than anticipated, at $269 billion, according to the Mortgage Bankers Association (MBA), up 7.6 percent over the year. One of the main reasons for the continued strength in origination volume is strong property price growth over the past several years. Property prices increased on average 12 percent annually going back to 2012, or a total of 89 percent (as of third quarter 2017). The increasing values encourages market activity such as property sales, refinancing, and renovations, all contributing to higher volume originations. Despite the interest rate spike at the beginning of 2017 and concerns that it might diminish multifamily investment, origination volume for the year grew by 8 to 9 percent, up to between $290 billion and $295 billion. Fannie Mae Multifamily closed 2017 with its record volume of more than $67 billion, supporting over 750,000 units of multifamily – the highest volume in the history of its Delegated Underwriting and Servicing (DUS®) program. Concerns that origination volume in 2017 would be lower due to the interest rate increase have diminished as strong multifamily fundamentals fueled investor demand. Property prices grew at an annualized rate of 10 percent as of the third quarter. A Look Ahead We expect originations to increase yet again in 2018, up to between $300 billion and $305 billion. That works out to 3 percent year-over-year growth. Interest rates are expected to slowly increase over the next year, up 30 to 40 bps through 2018. This increase will have little impact on cap rates, but they are expected to go up slightly, to around 6.1 percent by the end of 2018. In turn, property price growth will slow. Nonetheless, property prices will grow because of strong fundamentals, facilitating more market activity and increasing origination volume over the next year. Although origination volume is expected to continue to grow in 2018, there are potential headwinds. A moderate rise in interest rates will not send the debt market into a frenzy but, if rates spike again as they did at the end of 2016 and at the beginning of 2017, originations might slow in 2018. Furthermore, as other commercial and residential industries grow, some investment appetites might shift toward them and away from multifamily
Kommentare