No ‘Looming Threats’ to Multifamily Performance

The multifamily market’s current strong performance should continue throughout 2018 and well into 2019, said Freddie Mac Multifamily, McLean, Va.

Freddie Mac Multifamily Research and Modeling Vice President Steve Guggenmos said the multifamily sector continues to experience “very healthy performance” overall. He noted while fundamentals have started to moderate over the past few years, the most critical factors remain strong–rents are rising above inflation and vacancy rates are only increasing slowly.

Guggenmos and Freddie Mac Multifamily Manager Sara Hoffmann wrote the GSE’s Mid-Year Outlook report, which cited several factors for the sector’s strength in the first half of the year and into the future. “First, the multifamily market ended 2017 on a strong note, marked by lower vacancy rates than forecasted and unanticipated rises in rents,” they said. “This positioned 2018 to be the beneficiary as completions are expected to be only modestly higher and absorptions will remain strong, though they could fall short of the high level of new supply.”

The report said Freddie Mac expects completions to peak this year, so supply will remain “elevated” throughout 2019. “But demand will remain robust, driven by demographic and lifestyle preferences and will just fall short of meeting new supply levels,” it said. “As a result, vacancy rates will continue their modest upward climb and rent growth will moderate through 2019.”

The outlook noted an overall housing shortage for the past decade despite multifamily supply reaching 30-year highs.

“In addition, capitalization rates remain low with little change over the past several quarters despite increases in interest rates,” the report said. “Property prices continue to grow due to solid multifamily fundamentals and strong investor demand for multifamily properties.”

Guggenmos observed some moderation in the multifamily market. “But we continue to see the same factors at play as we have for the past several years: short supply coupled with demographic and lifestyle preferences fueling strong demand,” he said. “This reality will continue to lead to low vacancy rates and healthy rent growth while also supporting the elevated levels of new supply in the next few quarters without disruption.”