Peaking Rents, Record Supply May Spur A Multifamily Asset Selloff In These Five Markets
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There remains a large disparity between the luxury apartments being constructed and the working-class Americans in need of affordable apartments.
This divide is driving companies and renters from expensive core markets with inflated rents like San Francisco and New York to more financially manageable areas, and the migration is not going unnoticed by investors.
In a recent report, Ten-X Commercial researchers revealed five top sell and top buy markets for multifamily investors.
Ten-X recommends buying in Sacramento, Phoenix, Las Vegas, Raleigh-Durham and Jacksonville. All of these markets have benefited from population growth, strong absorption and rent growth thanks to favorable housing prices that have driven residents to these areas. This is particularly pronounced on the West Coast. Sacramento is leading the nation in rent growth as renters who cannot afford the Bay Area and Silicon Valley's expensive housing prices migrate there.
As for the top sell markets, it may come as no surprise that the country’s leading metros like New York and San Francisco are experiencing a shift in renting power as landlords increasingly offer concessions and perks to lure residents and remain competitive. According to Ten-X research, the five top sell markets for multifamily investors are New York City, San Francisco, San Jose, Washington, D.C., and Oakland.
Unprecedented supply in these markets is weighing on vacancy rates, and a migration by residents to more affordable markets is crippling demand, forcing landlords to get creative to compete. That is not to say job growth and employment levels are not sustaining activity in these five markets, Ten-X reports.
“While many large metro areas are increasingly exposed to both cyclical risk and massive oversupply, the overall market is being sustained by significant societal shifts that is driving strong, sustained demand,” Ten-X Chief Economist Peter Muoio said in a statement. “As long as gainfully employed millennials and other Americans continue to choose renting over homeownership, a majority of multifamily investors can be confident that rents will continue to rise.”
According to Goldman Sachs, 60% of millennials prefer renting to homeownership, a trend that will continue to gain momentum as millennials age. Research reveals this generation, the largest cohort in the world, is putting off major life events like marriage and having kids longer than generations of the past, leading it to favor renting over homeownership for longer spans of time.
This year alone, there are 2 million millennials that will fall within the prime renting ages of 20 to 34, according to Yardi research. That is nothing compared to the whopping 70 million millennial renters expected to hit their prime renter age in 2024 — which means multifamily can expect solid demand from millennials for at least seven years, Yardi reports.
A Steady Rise In Rents, And Record Supply
National multifamily rents have increased every month this year, albeit at a slower pace than in 2016, and July was no exception.
Apartment rents were up $1 in July, a moderate increase compared to the sharp jump in rents in June. Rents increased by $12 to $1,349 in June, the highest month-to-month jump in years, according to Yardi Matrix’s monthly survey of 121 markets. Yardi Matrix Department of Operations Manager Doug Ressler attributed this leap to seasonality. Rents tend to peak during the summer months as landlords raise prices to capitalize on demand.
“The multifamily market is very strong. The continuing renewal demand in primary, secondary and tertiary markets continue, and the occupancy rate is running at about 96.5%,” Ressler said.
Healthy absorption continues to power the sector forward despite expectations of record new deliveries hitting the market later this year. Yardi Matrix predicts multifamily supply will peak this year, with 360,000 new units expected to come online in Q3 and Q4. Though supply will remain robust in 2018 and 2019, Yardi predicts the pace will slow. Already the firm notes a slowdown in capital being deployed for multifamily construction, resulting in a delay in projected inventory growth for 2018.