Marcus & Millichap’s 2017 U.S. Multifamily Investment Forecast reports a high changeover in the makeup of the top-ranked multifamily markets between 2016 and 2017, based on current job growth, vacancies, construction, and housing affordability. The findings reflect the latest numbers in the real estate investment services firm's National Multifamily Index (NMI).

Los Angeles advanced 11 places from its 2016 ranking to take the top spot this year, owing to its forecasted decrease in vacancy rates and minimal supply growth. The Seattle–Tacoma and Boston markets advanced by seven places each to take the No. 2 and No. 3 spots, respectively. Meanwhile, last year’s leading NMI markets fell as others rose: San Francisco dropped from No. 1 to No. 7, San Jose from No. 2 to No. 8, and New York City from No. 3 to No. 10.

Strong GDP growth throughout 2016 is predicted to carry over into 2017. Uncertainty remains over fiscal, trade, and other policy goals not yet formulated by the new administration, which could create a drag on economic growth in the first months of the year. Also uncertain is the ability of the new administration and Congress to work together. Infrastructure spending could find some bipartisan agreement, but additional government borrowing might be needed to facilitate it.

Job growth remains steady, even as the market remains tight. Approximately 2.2 million jobs were added in 2016, and Marcus & Millichap predicts a labor market moderation to 2.0 million jobs this year. Potential new fiscal policies and an increase in consumer spending point to a predicted 2.5% range of GDP growth in 2017.

Apartment tenant demand will remain strong, owing to projected job creation and rental household formation strength. The ongoing flow of millennials into the workforce will also support high growth and low vacancy in the apartment sector.

Developers are expected to bring 371,000 units on line in 2017. National vacancy is projected to end the year at 4.0%, given increasing household formation, and average effective rents are expected to rise by 3.8%. Increased infrastructure activity may elevate competition for construction materials and labor as well.

Lending capacity for acquisitions and refinancing remains strong. However, the surge in the 10-year Treasury rate following the election appears to have created a new range for the rate’s benchmark, with some indication as to where long-term rates will land. The average cap rate held in the low 5% range given the rise of the average sales price in 2016, which led many investors to secondary and tertiary markets for higher yields. The current cap-rate spread between preferred and tertiary markets is about 200 basis points, close to the long-term average of 240 basis points.

Overall, Marcus & Millichap concludes that investors are “cautiously” optimistic about the year to come. Supply-and-demand imbalance is likely to remain a factor in some metros, which will lead investors to consider the effect of new supply on asset performance. Despite this influence, transaction volume should remain healthy. Speculation about the governance methods of the new administration is likely to persist and influence investors’ decisions as well, at least in the early months of the year.