5 Trends in Multifamily Investing for 2018

By Karlin Conklin

As 2017 ends, it’s time to predict upcoming trends in the multifamily rental market. If you’re a multifamily investor, there will be a few surprises and some changes you should be prepared for. Here are five areas to follow.

Building Renovations Stay the Course

There’s a considerable amount of new construction in cities where there is demonstrated and structural job growth, including Portland, Seattle, Los Angeles and Denver. Traditionally, developers have been able to pencil in growth and get a good return for the risk of that development. New multifamily units being constructed in urban areas, urban cores or high-growth and high-job areas have caused a softening in the Class A market for the first time in years. In the new-built market, we’re finally seeing a plateau where supply is meeting demand. Do we need more Class B properties built in suburban locations to meet demand? Absolutely. Are they going to get built? Probably not. The risk/return for developers just doesn’t pencil. The upside to a softening market? Older existing Class B multifamily units built in the ‘70s, ‘80s and even ‘90s, which have been renovated will be in higher demand.

Don’t Bypass the Suburbs

As the population is forced out of the urban core, the suburbs are becoming more attractive. This represents a golden opportunity for investors to look beyond the hot cities and search Class B properties in the outer ring of cities as well. If the suburbs want to grow and be vibrant, they need to create a sense of neighborhood that includes amenities. And that has, for many communities across the country, never been a part of their planning. People want a neighborhood. They want livability. They want walkability. They want an environment that draws people together. Purchasing a building is an investment into the community. Buying distressed buildings, under-performing buildings or under-managed buildings gives an investor the opportunity to enhance those neighborhoods.

Demographics

The biggest multifamily rental pools will continue to be Millennials and Baby Boomers, and to some extent Generation X. The Baby Boomer market will keep growing as there are more than 70 million Baby Boomers across the country. As this group ages and sells their homes, they’ll want to downsize to amenity-rich multifamily properties. The Millennial rental population will also continue to grow. Like Baby Boomers, Millennials want less space but more community, including the ability to walk or bike to work and have close access to shopping and dining. Many properties in close-in suburbs will fill this need.

Ever-Changing Interest Rates

Cap Rates have stabilized at a low plateau, but will likely inch up as interest rates climb. This makes it challenging to purchase a property and reach a return hurdle. Yes, the debt will remain available, but with uncertainty surrounding interest rates, it makes underwriting more challenging. Agency lenders like Freddie Mac and Fannie Mae, both a huge part of recent multifamily market growth, have always been solid debt vehicles for multifamily investors and will continue on that path.

Hot Markets for 2018

Transactional volume is down year-over-year in most markets across the country. The issue isn’t finding a multifamily property, but finding one that makes financial sense. Plus, many investors are looking for the same thing. Case in point: Portland, Ore. Many investors want to buy in Portland but can’t find a deal that makes sense. Just a few years ago Portland was considered a secondary market. Now it’s a top-tier market. Why? There’s job growth, in-migration, vibrancy and public investment in infrastructure. Cities like Portland, Denver, Charlotte and Seattle all have that trait in common and ones that investors will continue to seek out.

Parting Advice

We’ll see some pullback in the industry in 2018, compounded by a slowing of rent escalations in the market. That’s normal and nothing to be alarmed about. Buy right, underwrite correctly and hopefully you’ll make your money on the buy. If you get too exuberant in your underwriting, you’re going to have a difficult time getting your return on sale. Overall, it’s going to be another successful year.

Karlin Conklin is executive VP, Private Equity of Investor’s Management Group and principal of IMG Northwest.