While multifamily construction activity remains at record highs and certain markets suffer from overheated rents and pricing, investors are still eager for multifamily developments and projects, according to a new report by CRE global online marketplace Real Capital Markets (RCM). Based on surveys and follow-up interviews with capital investors, RCM attributes the positive outlook to consistently strong fundamentals and a favorable long-term forecast.

Rents have risen to $1.44 per square foot at the national level, up by 16% from 2014, when the rate was $1.24 per square foot, notes RCM. Year-end completions totaled 347,000 units last year, and cap rates have compressed by 70 basis points since 2014, down to 5.6% in 2017.

The average sales price per square foot has risen over each of the past eight years, up 56.8% from $125 per square foot in 2009 to $196 per square foot at the end of 2017. The vacancy rate has risen, from 7.4% in 2015 to 8.6% in 2017, but RCM attributes the increase to the large supply of new construction.

Further, homeownership rates have shifted down over the past 10 years, as fewer Americans can afford to buy a home or simply prefer to rent. As a result, multifamily demand is growing across all demographic groups, not just among millennials, and especially in urban areas. As Will Balthrope, senior managing director with IPA in Dallas, notes in the report, “people need a place to live.” And that fundamental human need is one of the market’s main drivers.

Multifamily sales volume was $69.8 billion in the first half of 2018, up 7.7% year over year, with an additional $250 billion committed to the sector from a wide variety of investment sources, RCM cites from Real Capital Analytics data. “Overall, the market remains strong with significant capital, both domestic and foreign, looking to be placed. The challenge for many investors is finding quality assets at reasonable prices,” says Tina Lichens, COO of Real Capital Markets, in the report.

Despite strong growth at the national level, 65% of survey respondents report a lukewarm outlook for rent growth, owing to supply levels in many markets. Investment pricing is also volatile in some sectors.

“In New York, it’s challenging for sellers to sell property, because they won’t like where the assets will trade. Expense growth is outpacing rent growth, and there is a supply issue,” says David Schwartz, CEO, chairman and co-founder of Waterton, in RCM's report.

Many market experts consider rising interest rates a concern, and 70% of respondents say rising rates will affect their investment strategy. According to these respondents, additional interest rate increases could lead investors to be more cautious in their underwriting or to shift their strategies against lower-yield assets. However, some suggest that rising rents could correct for the negative impact of rising interest rates.

Other threats to this strong market include increased competition and a lack of quality product, according to 30% of investors. Another 30% report overbuilding and market saturation as the greatest threat, though this doesn't hold true across all markets.

“Multifamily fundamentals remain very strong in the [San Francisco] Bay Area, in large part driven by high-wage employment growth in the tech and ancillary services sectors," says Phillip Saglimbeni, senior managing director, IPA, in the report. "As a result, we don't anticipate any meaningful shift or disruption that would alter the area’s housing supply–demand imbalance.”

Other threats cited by investors include stricter lending criteria, rising construction costs, a lack of affordability in many markets, and volatile global events that could “eliminate or severely limit liquidity in the market,” according to CBRE’s Tyler Anderson, vice chairman of institutional properties.

However, while investors remain cautious, over half (55%) consider themselves net buyers in this market. Just over a quarter (26%) are holding, to manage what they already own. Sixteen percent consider themselves net sellers, and the remaining 3% are holding to see how conditions change.

More than half of those surveyed anticipate marginal improvements in occupancy rates, and a slightly larger percentage foresee marginal rent growth.

Value-add properties remain popular with investors looking to create higher yields, but years of value-add dealmaking have created strong competition and a scarce supply of unimproved older properties. Across all deal types, 86.5% of respondents report intense investment competition.

Strategies for securing deals include shorter due diligence periods and higher levels of nonrefundable earnest money. According to Balthrope, some investors sidestep competitive pressure by pursuing opportunities in secondary and tertiary markets with strong demand and no oversupply.

More than 38% of respondents expect the multifamily market to remain healthy through the rest of 2018 and into 2019. Another 28% say the market may plateau but maintain a strong level of activity. Overall, RCM considers investors’ outlook positive through the rest of 2018 and into 2019, with market opportunities across all asset types.

“Housing is one of the most fundamental needs, regardless of income level or socioeconomic status,” says Steve Shanahan, RCM’s executive managing director, in the report. “Investors will continue to leverage those intrinsic needs, as well as strong market fundamentals, to create and take advantage of a steady stream of investment opportunities.”