Decelerating rent growth and a jump in new rental units are coming this fall, says Yardi Matrix in its newest edition of U.S. Multifamily Outlook.
Despite two quarters of weak GDP, strong nationwide employment growth and low inflation rates have offset earlier economic concerns, the report notes. Yardi predicts gains in consumer spending and wage growth in the wake of the employment spike. “Worries that the recovery is on its last legs appear to have subsided,” the report says.
As of August, rents were up by 5.0% year over year across the country, a deceleration from the 6%-plus increases seen in 2015 but still a strong rate of growth. Yardi attributes this moderation to current wage increases and affordability issues and predicts greater rent deceleration in tech-centric metros, where large rent rate increases have been met with an increase in supply. Nationwide, 360,000 units are set to be delivered in 2016, a staggering 45% jump from 2015’s 249,000 new units.
Yardi remains confident that multifamily real estate is one of the safest investment options for foreign and domestic institutions. The company has observed some increases in price appreciation for investors but predicts some flattening in the next year given low property yields.
“While the United States' economic growth is by no means off the charts, its steady, moderate gains are attractive compared to the rest of the world, and it has proven to be favorable for commercial real estate,” Yardi says. The company attributes the continuing economic recovery to the high rate of employment growth observed in the U.S. this year. More than 2.3 million jobs have been created since the beginning of 2016, with a monthly average of 186,000 new jobs as of July. Wages are up 2.4% year over year through August but are not keeping pace with rent increases.
The annualized GDP growth rate was less than 1% in the first two quarters of 2016, far below initial projections, but consumer spending has grown over the past four months. Yardi attributes the growth to wage inflation, strong gains in home values, and low oil prices.
The drop in oil has disrupted the Federal Reserve’s interest-rate strategy, and it remains unclear whether interest rates will increase before the end of the year.
And despite initial fears about the economic impact of the Brexit vote, “it seems the hype surrounding the historic referendum was more significant than the act itself,” Yardi says. The company predicts the vote won't have a significant impact on the global economy, though the company notes that whatever impact Brexit might have might not become clear for some time. The U.S. presidential election, the report notes, hasn't created any discernible volatility in the financial markets either.
Rent Growth Declines
August’s 5.0% year-over-year multifamily rent gain is down by 50 base points month over month, 110 base points lower than in April and 170 base points behind last October’s peak. Across individual metros, rents rose 5% to 8% in the Southwest and 3% to 5% in the East and Midwest on a year-over-year basis through August. This growth exceeds the rate of inflation and is higher than the 2.2% long-term national average.
Of Yardi Matrix’s top 30 metros, 18 of them, or 60%, have seen rent growth between 4% and 7%, with Sacramento, Calif., experiencing the highest rent growth, at 11.9%.
In its latest Outlook, Yardi highlights the rising millennial population, the downsizing baby boomer contingent, declining homeownership rates, and strong employment growth as stable drivers of the rental market’s growth. Occupancy rates are at 95.9%, nearly an all-time high even as supply jumps.
The deceleration is concentrated mainly in metros that are experiencing slower job growth and growing apartment supply. Houston’s shrinking energy sector and explosive apartment growth, for example, have made the metro the worst-performing in the U.S., while high-growth, tech-centric areas such as San Francisco; Austin, Texas; and Portland, Ore., are confronting affordability issues as their apartment supplies increase. The deceleration is in line with Yardi’s expectations.
Apartment Supply Increases
As of this report, 162,000 new units have come on line in 2016, and another 198,000 are expected to be complete before year’s end. The majority of new apartments are in the high-end sector and command higher rents than market-rate or affordable complexes geared toward “renters by necessity.”
Yardi predicts the short supply of new renter-by-necessity units may create a bifurcation in housing demand and occupancy, wherein the high demand for affordable units is not met by the high supply of luxury units.
Roughly 20% of this new supply is concentrated in Texas. Yardi says Dallas and San Antonio will have no problem absorbing the new units, but Houston and Austin may struggle as their job markets falter. Los Angeles, Orange County, and the Inland Empire of California are still experiencing low supply.
Capital Markets Slow
The amount of investment capital entering commercial real estate has slowed in 2016 as investors have pulled back from a market in danger of overheating, and sales volume has slowed in turn. In the wake of this turnaround, Yardi predicts the capital markets will experience a stable rate of growth moving forward.
Commercial properties continue to perform well, the report notes, providing investors with high incomes. The U.S. real estate market is considered a “safe haven” compared with other global markets, providing investors a stable economic foundation, according to Yardi. As a result, property values rose in the second quarter, by 3.2%, after flattening in Q1, according to the Moody’s/Real Capital Analytics Commercial Property Price Index.
Apartment property values gained 5.4% in the second quarter, compared with 1.8% in the first quarter. Yardi predicts these rates will flatten again, however, because property yields are more than 400 base points above the 10-year Treasury rate.
GSEs Await Election Results
Fannie Mae and Freddie Mac continue to grow their offerings and are now expanding into small-balance apartments and sustainable properties. Yardi acknowledges the worries about the impact of the presidential election on Fannie and Freddie, but the company predicts a gridlock between the new Congress and president, which might halt major changes.
“Not only would a solution be difficult from an ideological point of view, but it’s hard to generate political will to make major changes to housing when the sector is not experiencing any major crisis,” Yardi says in the report.
Yardi expects moderate economic growth to continue into next year. The weak GDP and the impact of the U.S. presidential election and Brexit may harm the market, but gains in job creation, wages, and consumer spending will offset any losses, the firm predicts.
Multifamily rents, as well, are expected to remain at a stable rate of growth, although concerns persist about a “handful of metros” where low job growth and high luxury supply are creating flat or declining rates.
