Tracking Potential Multifamily Risks

Multifamily fundamentals remain healthy, demonstrated by record second quarter absorption. But the sector faces some threats, analysts said.

Year-over-year apartment rent growth increased 10 basis points in July to 3.4 percent, noted Yardi Matrix, Santa Barbara, Calif. “In this prolonged positive cycle going back at least six years, the consistency and geographic diversity of [apartment] rent growth remain the most remarkable elements,” Yardi Matrix’s July Multifamily National Report said. “Other than persistent weakness in a very small number of metros, particularly Houston, one has to strain very hard to find bad news in the national apartment rent numbers.”

Yardi Matrix said the average apartment rent increased $3 in July to $1,469. Rent growth has remained at least three percent all year.

But the sector’s healthy performance takes place amid larger questions about the economy, Yardi Matrix said. The Federal Reserve cut interest rates in July for the first time since 2008. “In the short run, lower interest rates convey benefits for multifamily,” the report said. “Property owners are rushing to lock in long-term mortgage rates, and multifamily should see strong capital inflows from investors seeking healthy and safe returns. But there is potential for market volatility and slower growth.”

Marcus & Millichap, Calabasas, Calif., said multifamily operations and transactions were strong so far this year, but noted growing downside risks both economically and legislatively. “Economically, the rising trade tensions with China have already negatively impacted the manufacturing industry and caused many firms to reevaluate their supply chains,” the firm’s Midyear Multifamily Investment Forecast said. “Further escalation of a trade war could trigger a larger pullback in more industries and by consumers, lowering economic growth further than has already occurred. In addition, uncertainty over the possible impact of a hard Brexit on both Europe’s financial markets and the broader economy remains a potential downside risk for growth in the United States.”

But those economic risks are “overshadowed” by the threat of increasing rent control legislation in new laws passed and potential bills being proposed across the nation,” Marcus & Millichap said. “The [multifamily] investment market for the second half of the year will mull the risks from potential macroeconomic challenges such as moderating economic growth, political challenges from rising trade tensions and legislative challenges from growing calls for rent control.”