Multifamily housing is something we are constantly monitoring. Watching the market allows us to advise our property owners about important housing trends. After combing through the research and statistics, here’s some information that might be helpful in your decision-making process.
Expect 2020 to Be a Good Year
After a strong year in multifamily housing, expect an even stronger one in 2020, experts say. Occupancy rates were as high as 96.3% in 2019, which is well above the long-term norm.
Rent growth remains healthy at the national level and in most major metropolitan areas. Experts predict performance in the multifamily market will remain healthy into 2020. Some moderate growth is also expected.
Multifamily Supply and Demand
The number of multifamily units available is trending up. Supply is expected to moderately outpace absorptions throughout 2020. This is a statistic that has increased constantly over the last several quarters. However, those numbers are now expected to level off a bit. This is due to lower forecasted employment growth.
Declining Interest Rates
Most experts think there’s a good chance the Federal Reserve will end up cutting interest rates at least a couple of times in 2020. This could result in mortgage rates falling to a new all-time low in 2020.
“This is admittedly a bold prediction. The average interest rate for a 30-year fixed-rate mortgage is 3.99% as of December 10, and the all-time low (reached in 2012) is approximately 3.3%. Plus, the latest projections from the Federal Reserve show no further cuts in the federal funds rate in 2020, and the U.S. economy is generally strong by most metrics — unemployment, wage growth, and GDP growth are looking good.” Matt Frankel, CFP
The most recent data available on multifamily origination volume exceeded expectations. Volume in 2018 came in at $339 billion, as reported by the Mortgage Bankers Association (MBA), representing an 18.9% increase over the prior year. These characteristics, along with lower interest rates, will continue to create strong demand for multifamily investments through 2020. As a result, multifamily origination volume is expected to come in at $369 billion in 2019, up 8.8% from 2018, and $390 billion in 2020, an increase of 5.7%.
Buying or building in the suburbs will remain the best bet based on market performance and investment returns. Suburban multifamily will outperform urban, maintaining lower vacancy and achieving higher rent growth.
Investors and developers should also consider smaller metros (e.g., less than 2 million population). Many smaller metros are undergoing a significant upgrading of their urban cores, thereby improving quality of life and helping them retain talent.
New Solutions to Affordable Housing
The need for low-cost housing is at an all-time high — and not just for the lowest income earners but for median income, blue-collar wage earners, too. According to the National Low Income Housing Coalition (NLIHC), the United States needs more than 7 million affordable homes to meet the current housing demand.
“As construction and development for investment projects in Opportunity Zones (OZ) begin, I expect more private firms to follow suit. We are already seeing a growing number of private companies outside of OZ investment areas focus their efforts on constructing new housing projects, converting existing housing into affordable housing, or creative new adaptive reuse projects, where they convert old, vacant buildings like factories, schools, and office space into residential housing. As long as incentives for investors like the low-income housing tax credit (LIHTC) are around in 2020, private investment participation in affordable housing will likely increase.” Liz-Brumer Smith
Millennials will continue to move into homeownership, albeit at a modest pace due to affordability issues. Nevertheless, multifamily demand will remain sufficient enough to absorb most of new supply and to lower concessions in oversupplied markets.
Some experts say millenials have an altogether different attitude about buying a home. For this sector, affordability, portability and access to entertainment and experiences rates high on their list. Because of urban housing prices, which are skyrocketing, many are considering smaller urban markets.
Another consideration is record-high student loan balances, making a mortgage unaffordable for most. Many are avoiding home buying for this reason. Along with affordability and portability, millennials are favoring things in our communities such as smart home features (Nest thermostats and USB outlets), white-glove services such as valet trash, lavish swimming pools and outside eating areas, and hip cyber cafes.
Today, thousands of baby boomers are retiring…and downsizing. They will have challenges; the Insured Retirement Institute estimates that 45 percent of baby boomers have no retirement savings. Leaving work for them will mean a drastic lifestyle adjustment and a need for more affordable housing.
Furthermore, the NMHC estimates 73 million baby boomers in the United States accounted for 58.6 % of the increase in renter households between 2006 and 2016. With the expanding bubble of aging Americans, this number is expected to increase even further. The demand for senior living is increasing with the increase of baby boomers downsizing. We believe this trend will continue for the next 10 years, giving us a strong market in the senior living multifamily units.
According to the Harvard Joint Center for Housing, State of the Nation’s Housing, 2019, approximately 75 percent of renters would like to become homeowners at some point.
This being said, homeownership rates have been stagnant and are not likely to return to levels seen during the previous housing boom. Millennials are entering the housing market in a time where student debt is a major problem, housing affordability is low, and lending criteria is more stringent.
When you pair this with their lifestyle factors of delaying marriage and choosing experiences over saving, it is very likely more millennials will remain renters for longer than previous generations. If and when a market correction comes, this will cause an increase in the need for affordable housing, and many will look to multifamily.
Given the nationwide undersupply of housing and an economy that is projected to maintain positive growth, we do not see any short-term obstacles that would cause a significant downturn in the multifamily market.
Real estate is one of the most reliable and powerful ways to grow your wealth, but deciding where to invest can be overwhelming. If you are ready to jump into the real estate business, give us a call. The St. Louis market looks to remain strong for the foreseeable future. We’ll be happy to make some suggestions about properties and neighborhoods we think have good investment potential.