Multifamily Worries Mount as Cycle Ages

The multifamily market remains healthy despite increasing worries including an aging economic cycle, growing supply, decelerating rent gains and increasing interest rates, said Yardi Matrix, Santa Barbara, Calif.

“Overall demand continues to be bolstered by positive demographic drivers and the consistent growth in jobs that has kept the nation near full employment,” the firm’s Multifamily Outlook: Performance In an Aging Cycle report said. “With no signs that the economy is about to slow down, the apartment market is in a good spot, although the heady days from earlier in the cycle are past.”

Yardi Matrix said it expects U.S. apartment rent growth will remain “moderate” overall, led by growing southern and western metros in which supply growth has not gotten too far ahead of demand.

“Maybe the biggest concern for commercial real estate is the impact of rising interest rates as the 10-year Treasury rate started May flirting with 3 percent, the highest it has been in several years,” the report said. “With a rising federal deficit, a more hawkish Federal Reserve and higher growth anticipated, rates are more likely moving up than down. That could drive up the cost of debt and depress real estate investment trust stock prices.”

While the financial markets could stagnate as interest rates rise, Yardi Matrix predicted “continued steady” job growth, which will put downward pressure on the unemployment rate. “Workers continue to come off the sidelines and enter the labor force, increasing the participation rate and driving down the underemployment rate. As these trends persist, expect wages to continue rising, which may finally force overall inflation upward as well,” the report said.

After stagnating over the winter, apartment rent growth picked up in the spring, indicating the real estate cycle has some steam left, the report said. “With the economy continuing to perform well, adding more than 180,000 jobs per month, demand [for apartments] remains healthy. Gains are led by the late-cycle markets such as Orlando, Tampa, Las Vegas and Phoenix.”

Nationally, rent growth has settled into the 2.5 percent range, but momentum will likely pick up during the summer, Yardi Matrix said. It predicted rents will appreciate 2.9 percent in total this year, slightly above forecasts early in the year. “That rate is still relatively tame compared to some of the highs we’ve seen over parts of the cycle,” the report said.
Apartment rent increases will be constrained by the large amount of supply coming online that led to a roughly 80-basis-point drop in the occupancy rate over the last year, the report said. Metros with the largest occupancy drops, including Nashville, Tenn., Portland, Ore. and Seattle–which all saw 160 basis points occupancy drops year-over-year–have seen “severe” rent growth moderation.

“Another constraint on rents is affordability, which is a problem in gateway markets such as New York, San Francisco and Washington, D.C.,” Yardi said. “Meanwhile, smaller markets are leading growth, thanks mostly to the spillover effect from major technology-driven economies such as Tacoma, Wash., Sacramento, Calif. and Colorado Springs, Colo.”