SVN: Multifamily Supply Meeting Demand
Multifamily supply is growing rapidly as developers, investors and lenders start new projects, but demographic data and economic indicators show an increased need for apartment units across the nation, reported SVN, Boston.
“New supply is meeting new demand,” SVN’s Multifamily Market Outlook said. “Many markets are prone to undersupply as population and job growth are moving faster than developers can deliver units.”
Real Capital Analytics, New York, said the national multifamily market set a record last year with more $151 billion in sales, a 34 percent year-over-year gain. National cap rates fell below 6 percent, the lowest average cap rate ever.
Freddie Mac Multifamily, McLean, Va., said the sector showed strong fundamentals in the first quarter. The GSE’s Apartment Investment Market Index, which examines rental income growth, property price growth and mortgage rates to give investors an objective view of market investment conditions, increased slightly to 107.4 from 107 in the fourth quarter.
“The stability in national AIMI values underscores the essential strength of the multifamily market for potential investors,” said Steve Guggenmos, Vice President with Freddie Mac Multifamily Research and Modeling. “Property price and net operating income growth continue to outperform their historical averages in the majority of metros.”
Guggenmos said despite relatively high multifamily construction, “the overall strength in the labor market and underlying demographic trends are creating robust demand for new multifamily units.”
Multifamily asset performance should remain steady as demographics favor renting versus buying, SVN said. “However, as rents grow (which has happened dramatically in some markets) owning will be cheaper and thus demand growth could be tempered,” the report said. “Thus, if a developer can supply units that can be rented at relatively affordable rents, they will likely be able to maintain very high occupancy for the long term. Any downward pressures would be experienced in the expensive Class A products first; however this is not expected to happen in 2016.”
SVN acknowledged reason for concerned that if interest rates rise cap rates will also rise, leading to lower values. “This risk is logical and certainly has long-term implications,” the report said. But it noted that in the short term the spread between multifamily cap rates and long-term bond rates is nearly 300 basis points in many instances and shows little risk compared to the past bubble.
“Investors are relying on sustained NOI growth rates of above 3 percent to counter any negative effects of long-term interest rate moves; given the demographic forces, this is not unrealistic,” SVN said. “It can be rationally argued that 2016 and 2017 may be the time to sell and raise liquidity.”
