Multifamily has experienced several years of advanced growth with a particularly strong showing in 2016. By all expert accounts, 2017 will be much of the same. This sector currently leads the commercial real estate pack, outperforming other sectors with the lowest vacancy rate of all property types, sitting at 5.2% at the end of 3Q16. Not only that, the sector posted a rental rate increase of 3.9% over 2015. 2016’s steady economic growth has contributed to strong demand for multifamily units, resulting in increased construction permits and increased rents.
So what are the multifamily trends to watch in 2017? What we are reading from the experts is that 2017 is expected to see a greater amount of new supply. In addition, we’ll see a slight leveling off of rental rate growth and a few new potential risks to watch out for. Below we outline those trends and reinforce that this sector is still the ideal investment asset to combat any volatile economic cycle.
For an in-depth look at 2017’s projected multifamily market performance, and a review of 2016, see this recent Multifamily Outlook Report from Freddie Mac.
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High Occupancy Rates
CoStar reports that multifamily’s national vacancy rate is projected to increase from 5.2% to 5.6% in 2017 (5.7% in 2018). Although, even with a slight increase it’s still way below the 15-year average of 6.1%. Good news it that absorption and occupancy rates are still on track to exceed historic averages.
Experts agree that 2017 will see a higher amount of new supply delivered, with strong fundamentals pointing to most of it being absorbed. Developers are predicted to complete 363,000 multifamily units this year, an increase of 74,000 units from 2016. With wages increasing and employment growth higher than population growth, experts predict that demand for multifamily units will remain robust throughout the coming year.
Rental Rate Moderation
Experts say multifamily rental rate growth will moderate over the next two years, which CoStar reports coming in at 2.3% for 2017 and 2.2% for 2018. Though it’s important to keep in mind that these beat the 1.9% 15-year average growth rate.
Even saying that, multifamily rents are still quite likely to rise in most markets across the United States. Areas that may see a slowdown are in multifamily luxury units, which are expected to see oversupply in 2017. Also expecting a rent growth slowdown are larger metro areas that have a misbalance of supply and demand, such as San Francisco, Austin and Denver.
Overall, multifamily will still remain a highly desirable sector to investors and renters in 2017. Especially knowing that the number of millennials reaching prime renter ages of 20 to 34 will reach 70 million over the next 7 years.
Potential Risks to Watch
Let’s start with what we know: multifamily market conditions have been good, fundamentals have been strong and we’ve seen stable property income. That doesn’t change that there is always concern of the multifamily market peaking. Record levels in 2016, current economic conditions associated with the new presidency and rising interest rates have made investors a little weary.
Risks to multifamily transaction volume that have been floating around include weakening capital market fundamentals, an imbalance of supply and demand and rising debt costs.
Multifamily Outlook is Strong
2016 multifamily sales volume saw another record year with increases in per unit sale prices experienced most of the year. There is always going to be a prediction that too much supply will cause rent growth decreases and rampant vacancies. We get it, but honestly that is just simply not happening.
After reading what all the experts have to say, from Freddie Mac to Yardi to CoStar, 2017 is expected to see a strong performing multifamily sector. Yes, sales volume will see a small dip, rental growth will slightly moderate in certain markets, but the sector still sits as one of the safest and best performing in all of commercial real estate.
Percival Partners is one of Charlotte’s most recognized and respected commercial real estate firms with more than 50 years experience in the region. Our professional and experienced real estate Advisors are in the business of listening, understanding, and adding value. No matter the commercial property type you own or seek, you can count on the Percival Partners team to maximize your return and peace of mind. To reach us, you can call us at 704.632.1000 or follow us at @SVNPercival, LinkedIn or Facebook.