Apartment Market Has Bright Future at 2018’s Midpoint

While the market has softened slightly, there is still ample reason to believe the industry will continue to experience healthy operating fundamentals throughout the rest of 2018 and beyond. Here are four reasons why.

Jay Madary

If you’re like me, you may find it hard to believe that August is almost already over. 2018 is truly flying by.

Now that we’re past the midway point of the year, it seems like a logical time to take stock of how the apartment industry is faring and the trends that may affect it during the rest of 2018 and beyond.  

After years of white-hot performance, the market is currently experiencing some effects of the recent increase in new development. According to RealPage, the second quarter was the fourth consecutive quarter in which the annual rate of construction completions exceeded 300,000 apartment homes.

As a result, the national occupancy rate stood slightly lower at the end of June (95 percent) than it did one year earlier (95.3 percent). Despite the small dip, “apartment leasing in aggregate remains very strong,” RealPage notes.

Relatedly, national annual rent growth was 2.3 percent in the second quarter, somewhat below the increases posted during the market’s recent peak. In fact, that marked the lowest annual increase over the past eight years.

While the market has softened slightly, there is still ample reason to believe the industry will continue to experience healthy operating fundamentals throughout the rest of 2018 and beyond. Looking beyond occupancy and rent-growth data, here are some reasons for optimism:

Robust job growth

Jobs are the lifeblood of apartment demand, and job creation in the U.S. is sizzling. The unemployment rate reached an 18-year low this spring, and a healthy 213,000 jobs were added to American payrolls in June. The U.S. GDP grew by 4.2 percent in the second quarter, and the current administration’s pro-business policies provide reason to believe strong job growth will continue.

Rising interest rates

We’re in an environment of increasing interest rates, and that presents both pros and cons for the industry.

On the one hand, rising rates mean the cost of debt for acquisitions and development is going to go up. But they also mean the expense of buying a home is going to increase, and that should result in more people entering the renter pool.

More challenges for homeownership

After reaching a 50-year low of 62.9 percent in 2016, the U.S. homeownership rate has rebounded a bit recently and registered a mark of 64.2 percent at the end of last year, according to The State of the Nation’s Housing 2018 report from Harvard University’s Joint Center for Housing Studies.

However, as the report notes, homeownership is still bound to face some challenges in the years ahead. “The upward climb of interest rates, limited inventory of homes for sale, widespread increases in student loan debt, and insufficient savings for down payments raise important concerns about the ability of many potential buyers to access homeownership,” the report says. 

Various sources of rising demand

Delayed marriages, an aging population looking to move out of single-family homes and increasing international immigration are some of the reasons a study from the National Apartment Association (NAA) and the National Multifamily Housing Council (NMHC) predicts soaring demand for apartments over the next decade-plus. According to the study, 4.6 million new apartment homes will need to be built by 2030 just to meet the demand, the report says. 

At the same time, rising development costs could make it a challenge to build the needed new supply. The high cost of new construction stems in part from expenses related to regulations. A new report from NMHC and the National Association of Homebuilders (NAHB) says that regulations from local, state and federal governments account for an average of 32.1 percent of multifamily development costs. As a result, developers often have to build high-end communities to cover their expenses and deliver suitable returns.

The report certainly doesn’t advocate for regulations to be eliminated entirely but it does urge “governments to do a thorough job of considering the implications for housing affordability when proposing and implementing new directives.”

Add all these factors together, and it’s more than reasonable to conclude that the multifamily sector is set to experience healthy occupancy and rent growth for a good long while.

Jay Madary serves as president & CEO of JVM Realty Corp., an Oak Brook, Ill.-based apartment owner and operator.

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