TenX: Multifamily Sector Reaches ‘Inflection Point’

The multifamily sector is beginning to hit an ‘inflection point’ after years of booming growth as national rent growth decelerates and vacancies creep upward, said Ten-X, Irvine, Calif.

The firm’s U.S. Apartment Market Outlook said multifamily completions will likely exceed 260,000 units this year for the second straight year while nearly 200,000 units will be absorbed. As a result, vacancies should rise in 2018 and beyond, the report said. In a modelled cyclical downturn from 2019-2020, vacancies would approach 6.0 percent in 2020 before an economic recovery in 2021 brings renewed demand.

Rent growth will likely remain at 3 percent in 2018 then slow but remain positive during the modelled recessionary years. Ten-X sees this down cycle as more “benign” for the apartment sector than previous downturns when rents actually declined.

“All good things come to an end, and this truism is now to become manifest in the multifamily sector where the long-anticipated turning of the cycle is underway,” said Ten-X Chief Economist Peter Muoio. “Developers have spent years betting on the shift in preferences towards renting and living in walkable urban downtowns. Now the critical mass of supply deliveries is weighing on the sector. While the downturn’s effects should not be cataclysmic for multifamily owners in most markets, there’s no denying that the sector’s outlook is distinctly grayer than a year or two ago.”

U.S. apartment rents rose 3.3 percent over the past year, a fairly healthy pace but down significantly from the nearly 6 percent growth rate seen in late 2015 and early 2016. The sector’s overall deal volume totaled $41 billion during the third quarter, an 11 percent increase from the same period in 2016.

Some markets remain favorable for multifamily investment, Ten-X noted. The report said investors should consider buying multifamily assets in Sacramento, Calif., Raleigh, N.C., Riverside-San Bernardino, Calif., Jacksonville, Fla. and Fort Worth, Texas. “In these regions, demand for apartment rentals continues to be driven by household formation coupled with a dearth of single-family starter homes for purchase.”

Other markets including San Francisco, San Jose and Oakland, Calif., New York City and Miami are cities where market conditions might cause multifamily investors to consider selling their properties, TenX said. “These cities face rising vacancies and flattening rents as a flood of new supply is hitting the market following years of development.”