Occupancy Drop Will Be Short-Lived
Multifamily faces some hiccups, as loads of apartments come online this year. But have no fear, permanent lifestyle changes are here, which means the sector will continue to outperform office and retail.
300,000 apartments will deliver across the US this year, prompting vacancy to edge up to 4.5%, says Delta Associates CEO Greg Leisch, who keynoted Bisnow’s Baltimore Multifamily Summit on Wednesday. But that is still a record low. Plus, it’s all part of the cycle, and this is a short one, he says. Rents will rise nonetheless—at or even above the long-term historical average of 2.7%. And multifamily’s 9.9% returns/year for the past 20 years put it in a better spot than office and retail. Plus, Millennials who are ditching their cars for public transit, bikes, and walking have more money to spend on rent, he says.
The population in most city centers dropped steadily from 1960 to 2000, Greg says, but in the past decade, a given city center has gained an average of 1,500 residents a month, and that’s driving development. In Downtown LA, a no man's land until recently, five projects totaling 1,705 apartments are under construction. And in Philadelphia (above), 12 projects totaling 2,100 units are under construction or in initial lease-up. In the past 20 years, Greg notes, 47 Downtown Philly buildings have converted from office to multifamily, removing 7.7M SF of office supply. Unit sizes in city centers, meanwhile, have dropped as much as 15%—to an average 771 SF in DC and 778 SF in Seattle. (If you can't find your frying pan, you may have left it in that 15% that got removed.)
While younger renters go for smaller units, they demand more amenities and outdoor space, Greg says, making older buildings obsolete. That’s a good thing, he argues, because in change come opportunity. And that opportunity will stick around as Millennials stick with apartments rather than owner-occupied housing. Student debt levels are high while job prospects are slimmer, and fewer will marry and have kids, he says, reducing the demand for the suburban life.