Across all the real estate markets surveyed in PwC and the Urban Land Institute’s Emerging Trends in Real Estate report, the multifamily market ranks No. 2 for both existing product and new development, owing to the multifamily market’s early recession recovery compared with other real estate sectors.
The social and economic conditions following the recession and into the recovery were and still are just right for rentals:
- an influx of millennials at a prime renter age entering the workforce;
- a general wariness of for-sale housing, given the recession;
- credit issues;
- rising student debt;
- tighter home mortgage requirements; and
- a generally flexible consumer mind-set.
In addition, some higher-income, empty-nester baby boomers have crossed over into luxury urban apartment rentals, whether they’re downsizing from the suburbs or leasing a second property.
That said, a current weakness in the apartment market is the expense required to build a multifamily property. Affordability has been highlighted as a “key issue” in the rental market, especially in expensive areas with high job growth.
“Nonsubsidized new construction is basically infeasible,” the report says. “In past cycles, older product may have trickled down to lower-income renters, but in this cycle new construction has been insufficient to moderate rent increases on this older product.”
The most desirable properties are in walkable job centers, but their tenants, millennials in particular, are compromising on size and renting smaller units in order to live in more-desirable areas. This explains the micro-unit trend, as well as a rise in shared amenities and public spaces that tiny apartments can't offer in a private setting.
However, the report notes the fears that come with strong performance and development. In major markets, rental rates and net operating income (NOI) growth are slowing or even declining, as is the case in New York, San Francisco, and Seattle. A large volume of new construction does exist in these markets, but much of the young professional demographic can't afford their rent. In less-expensive markets, rents and NOI growth are also slowing, but not at the same rate.
As yields in primary and secondary markets reach historic lows, American REITs and other investment institutions are turning to development instead of purchasing. Some fear a coming downturn in the tech markets, while others worry about older millennials crossing over from renting into owning. Some capital sources have chosen to invest in what PwC calls an “urbanized inner suburban ring,” as rents rise and new supply remains low.
The survey's respondents cited New Jersey’s Hudson Riverfront; Northern Virginia; Oakland, Calif.; and Southern California’s Tri-Cities as attractive investment sites. Class B properties are still popular “defensive” acquisitions, although many investors have indicated a preference for renovated properties, the report notes.
The report predicts that U.S. investors will likely continue to acquire properties, but at a more-muted pace compared with previous years. “A pullback by lenders for new construction is likely to correct any imbalance fairly quickly,” its authors say.
