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While the U.S. multifamily sector basks in a period of extraordinary growth and vibrancy, owners, investors and residents alike should remain on guard against potential headwinds.
This was a key message in a recent state of the industry webinar presentation by Jeff Adler, vice president of Yardi Matrix, with assistance from Jack Kern, director of research and publications.
Adler repeated many of the macroeconomic themes in his and Kern’s recent U.S. office industry update: The economy is in good shape, the labor market is tight, wages are rising, the Treasury yield curve remains flat and high American oil production is taming inflation. In addition, demographic and lifestyle factors such as divorces that produce new renters, young people marrying later in life and an older population living longer, healthier lives, are fueling a demand for multifamily housing that could exceed 425,000 units annually. Job formation and in-migration to favorable markets will continue fueling this demand for the foreseeable future.
While this environment is favorable for absorbing current supply, housing production isn’t likely to keep up with future demand, especially in locations with anti-growth and rent control policies. A worrisome potential outcome is “pain on the affordability side that becomes a danger to the industry,” Adler said.
Although homeownership costs are rising faster than renting, the median asking rent has exceeded the inflation rate since 2012. The cumulative weight of those increases is now bearing down on median-income residents in urban locations. Moreover, metros such as San Francisco, Portland, Ore. and New York City drive rents up by constricting new supply, then apply rent control to shield residents from the impact. This approach backfires, making housing even more scarce and unaffordable and prompting outmigration, Adler said. These factors and high taxes have resulted in New York state, New Jersey, Connecticut and California losing population to places like Raleigh, N.C.; Nashville, Tenn.; Florida metros Miami, Orlando and Tampa; Phoenix; Salt Lake City; and Boise, Idaho. The departure of a relatively small number of high-end earners can be enough to disrupt state budgets, Adler said, so policymakers in those states “should worry.”
With regulatory compliance already accounting for one-third of multifamily development costs, a better option than more mandates, he said, is enabling supply to respond to demand, as seen in Seattle, Dallas, Denver, Houston and Charlotte, N.C. Other market-oriented responses include coliving arrangements that reduce space needs, streamlined zoning and modular construction. Adler is working with several multifamily industry groups that are attempting to unite all constituents in identifying market-oriented solutions.
Unsurprisingly, employers are seeking lower costs in locations with high-quality intellectual capital and moderate costs. Tech hubs such as Phoenix, Dallas, Houston and Atlanta are experiencing the most dynamic job growth. Other cities that combine intellectual capital with significant cost advantages include Minneapolis, Indianapolis, Ann Arbor, Mich., and Columbus, Ohio. Rent growth is likely to be highest over the next couple of years in tech hubs and tertiary markets like Reno, Nev., Macon, Ga., Sacramento, Calif., Tacoma, Wash., and Fort Wayne, Ind.
In sum, strong demand will continue, businesses and workers will continue moving south and west to intellectual capital nodes within tech hubs, and rents and occupancy rates will rise for the foreseeable future. With few opportunities for discounts, multifamily sector investors will need to research deeply to find the right deals at the right prices. On the operational side, finding revenue and cost-cutting opportunities to grow NOI from existing assets is the soundest strategy.
All things considered, the multifamily market good times can keep rolling if the headwinds are recognized and dealt with.
Learn more in the complete multifamily market update.
