According to CBRE, 2019 multifamily investment activity will reach peak volumes with the forecast exceeding $150 billion for the year. While whispers of a slowing economy and higher interest rates concerned many in the first quarter, buyer demand continued to dominate early this year as it did in 2018. The first quarter is historically the most competitive period for multifamily acquisitions. Moving into the third quarter, there’s little indication activity will let up as many are wondering if multifamily investment will remain the “darling of deal making” this year or if appetites will taper as financing becomes more challenging. Here are five considerations in looking ahead at the multifamily investment landscape:
1. Employment Spread from Urban Core to Suburban Sprawl
In previous economic cycles, job growth occurred primarily in urban cores or suburban submarkets with large nodes of office space. However, new job types and their respective locations have evolved over the last decade. The rise of e-commerce radically altered distribution channels, which has led to a substantial need and increase in logistics/shipping jobs. Given the low-rise, large-format warehouse/flex space needed to support this business, most of those new jobs are located in nontraditional suburban areas where land prices are more affordable, but access to major transportation infrastructure is present. As a result, many of the blue- and gray-collar submarkets are seeing real employment growth, which is increasing housing demand in those same workforce neighborhoods.
2. Baby Boomer Migration
Many in high-tax states felt the impact of the $10,000 cap on state and local tax (SALT) deductions this year. Now experts say disgruntled residents in Connecticut, New Jersey, and New York are looking for ways to alleviate the added financial burden, which is starting to translate into migration to lower-tax states in the Southeast and Sunbelt regions. Coupled with an attractive warmer climate and lower costs of living, the cap on SALT deductions has the potential to speed up baby boomer migration. Today, we see it in most Florida markets, Atlanta, Nashville, and Raleigh-Durham, N.C.—all of which have become major retirement hubs and migration magnets for baby boomers. The consequent population change could carry significant implications for economic growth and housing demand.
3. Finance Factors: Fannie, Freddie, and Following the Jobs
According to the Mortgage Bankers Association, first quarter volumes were higher for nearly every property type, [including multifamily,] and we saw double-digit growth in loan volume for Fannie Mae and Freddie Mac. What Freddie and Fannie do next with the remaining capped allotments will ultimately affect the liquidity of much of the market for the remainder of 2019. The slowdown in job growth and household formation could also impact some markets more heavily than others. When deciding which markets to pursue, lean toward a highly diversified regional economy, where industries generally perform well in different times of the economic cycle. Markets with employment weighted toward health care and education can create a buffer against job losses in other more volatile industries. Similarly, cities with strategic transportation infrastructure should also continue to outperform due to the continued job creation in shipping/logistics businesses.
4. No Simple Solution for the Widening Gap
With multifamily residents spending an average of 25% of incomes on rent, most markets have headroom to deliver further rent growth. However, experts agree, the main macroeconomic exposure affecting today’s multifamily investors likely centers around affordability. The workforce housing markets are not without risks either, specifically with the ability of renters to absorb increases when wages are not rising as quickly as rents. While we’ve seen an uptick in wage growth, it’s still not keeping pace with rent growth in many markets. Furthering the macroeconomic risks is the political question of how cities and states craft legislation to regulate the issue of affordability. While there’s no silver bullet, the politically expedient option of rent control often backfires in causing housing shortages and widens the growing wage-rent gap.
5. Forget the Crystal Ball and Ditch Distractionsbr>
We’re now the ninth year of the current real-estate expansion and one of the longest economic expansions in U.S. history. With the dreaded “R” word at the tip of everyone’s tongue, many have been predicting a downturn for many years. At Fogelman, we’re not in the business of predicting the exact timing of recessions. However, as economic growth slows, now is the time to stay disciplined and stick to a dedicated set of investment principals. Investing in markets with diverse economies, manageable supply pipeline, and a “tailwind” behind property-level performance remains central to our strategy.