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It comes as no surprise that some in the commercial real estate industry are talking about the multifamily sector reaching a “bubble” in 2016. And even though the pundits have been making the exact same prediction for the past several years now, there's still a strong case to be made for asking, “How could things get any better than last year?”

Multifamily occupancy rates were at 94.6% through the first half of 2015, and renewal rates were trending 5.4% higher than 2014's levels. None of the major rental markets was experiencing significant overbuilding as rental demand and absorption continued to outpace supply. On the investor side, foreign capital poured in at an 80% higher level than in 2014 as part of a huge influx of institutional investors entering the sector. Private equity funds, REITs, pension funds, and other investors were all looking for a “safe bet” in deploying previously sidelined capital. As a result, nearly 3 million rental units were in the hands of institutional investors last year.

So, with all of 2015’s positive news heading into 2016, is the multifamily bubble likely to finally burst this year? CohnReznick doesn't think so. Demand for rental properties should continue to significantly outpace supply, although there may be a number of changes to the marketplace dynamics. Once again, much of this will be propelled by the millennial generation’s desire for virtually around-the-clock work/live/play communities centered on attractive and affordable rental housing. But it will also be driven by investors who continue to see multifamily as the “shining star” of the commercial real estate industry.

Here are several trends to watch for in 2016.

Eyeing the Submarkets
The millennial generation, now representing about 25% of the population, has traditionally been concentrated in the major urban centers across the country. But with growing affordability issues in primary markets like New York, San Francisco, and Los Angeles, millennials have begun setting their sights on new territories like Palm Beach, Fla.; Northern New Jersey; Pittsburgh; Atlanta; and Minneapolis. The live/work/play lifestyle they’re seeking doesn’t exist in the big cities alone; it can be found in smaller markets as well—for a much lower monthly rent.

Consequently, multifamily developers are increasing their focus on key submarkets, many of which have begun a transformation into 18-hour cities offering the types of urban amenities millennials want. Uber has extended its reach from urban centers such as San Francisco and New York to more than 300 cities worldwide. Likewise, bike-sharing programs like Citibike and Capital Bikeshare can now be found in dozens of small cities, including Portland, Maine; Alexandria, Va.; and Boise, Idaho. The lifestyle millennials once sought in the nation’s largest cities is now available to them in smaller ones.

Growing Focus on B/C Properties
With secondary markets trading at significant discounts versus primary markets, multifamily investor strategies are also changing. In addition to focusing on investment properties in small cities, they're also shifting from Class A properties to B/C properties. While Class A has been the driver of new construction in previous years, affordability issues and the potential for overbuilding this class of properties are causing investors to rethink their portfolio strategies. Additionally, vacancy rates for B/C properties are incredibly low—only about 3.2 % at the end of 2015.

Rental demand for B/C properties is clearly outpacing supply in many markets, and investors are seeing significant value and opportunity in the B/C property classes.

Private Equity and Foreign Investors Becoming Bigger Players
Private equity funds, in particular, have begun to step up their investment activity in the multifamily sector. With private equity investment at its highest level in more than eight years, there has been significant growth in transactions translating to hundreds of properties containing some 20,000 to 40,000 units.

Inbound foreign capital, a major source of multifamily investment in 2015, is expected to grow again in 2016, according to the 24th annual survey of the members of the Association of Foreign Investors in Real Estate (AFIRE). And multifamily and industrial are the preferred property types for these foreign investors. Nearly 65% of AFIRE’s members expect to have modest or major increases in their investment in U.S. real estate in 2016, according to the survey.

New Crowdfunding Rules May Entice Multifamily Investors
One of the more recent developments in investment opportunities is Regulation A+, which was passed as part of the JOBS Act and went into effect last October. The new regulation allows for the crowdfunding of a wide range of investments, including commercial real estate, up to a $50 million Tier 2 limit. We're already seeing crowdfunding platforms that are utilizing Regulation A+ for multifamily fund-raising. For one multifamily fund focused on properties in the Philadelphia area, individual investors can get in for $20,000.

While it's too soon to know what the ultimate impact will be on multifamily investing, Regulation A+ may attract a whole new pool of investors. This could be a very good thing for a sector that has been red hot for several years and, in our opinion, shows no signs of cooling off anytime soon.