Fannie Mae notes that as long as job growth holds up, multifamily is expected to remain a favored asset class for commercial real estate investors in 2020, leading to possible further cap rate compression, increased sales and higher origination levels. Commentary provided in the 2020 Multifamily Market Outlook report notes the Mortgage Bankers’ Association is projecting multifamily originations volume may reach $395 billion in 2020, up from $364 billion in 2019.
Doug Duncan, Fannie Mae’s senior vice president & chief economist, said in a prepared statement Fannie Mae expects consumer demand will re-establish housing construction as a significant contributor to economic growth this year. Despite simmering geopolitical tensions, trade concerns and other issues, Fannie Mae is forecasting full-year 2020 economic growth at 2.1 percent and upgraded full-year 2019 real GDP growth to 2.4 percent due to an unexpectedly strong contribution from net exports. It also expects the Federal Reserve will not raise interest rates this year. Fannie Mae’s Economic and Strategic Research group believes in its forecast so strongly it stated Fannie Mae’s economic theme for 2020 is: A resilient economy overcomes risks to drive housing.
The ESR group notes single-family construction is also expected to have solid growth this year, citing strong permits data and growing optimism among homebuilders. Low mortgage rates and the strong labor market should continue to drive demand. The group does recognize that affordability is still an issue, particularly for entry-level homes, where there is a demand-supply imbalance and prices outpace wage gains. But it notes homebuilders are beginning to increase construction, including in the affordable space. Fannie Mae is forecasting full-year growth in single-family housing starts of 10.0 percent in 2020, up from 9.8 percent.
The ESR group said it had revised its forecast for multifamily starts to 385,000 in 2020, up from its previous forecast of 376,000. The researchers noted multifamily starts in 2019 ended up stronger than anticipated with starts up 4.9 percent in November and 11.8 percent in October. It also stated multifamily construction permits have recently been stronger than expected.
“Rent appreciation and income growth rates have recently converged, implying that rental property markets are currently balanced, but we expect strength in multifamily construction to persist as solid job growth and demographic trends continue to boost demand, while low interest rates are likely to continue enabling corresponding increases in supply,” the Fannie Mae forecast stated.
Economic and market commentary for Fannie Mae’s 2020 Multifamily Market Outlook provided by Kim Betancourt, director of economics, and Tim Komosa, economist manager, noted the main theme of that report is: Staying the Course. The outlook commentary states the nation’s more than 80 million Millennials have been the biggest driver of multifamily demand in recent year. That group, combined with Generation Z which is beginning to reach adulthood, is expected to continue driving demand, particularly for rental housing.
Sector fundamentals are projected to remain essentially the same this year with the vacancy rate increasing slightly and rent growth remaining positive, both similar to 2019’s pace. New supply in some markets is expected to contribute to the slightly higher vacancy rate, which is anticipated to be in the 5.5 percent to 5.75 percent range early in the year and possibly end the year closer to 6.0 percent. Fannie Mae expects rent growth, which is estimated to have ended 2019 at about 2.5 percent, will be in the 2.0 to 2.5 percent range this year.
Supply and Demand
Fannie Mae notes there is the potential for a slight supply/demand imbalance this year, particularly in more expensive Class A units. Much of the new supply in 2020 is expected to deliver early in the year and be concentrated within a few submarkets within 10 to 12 metros. Demand may vary depending on the amount of job growth in those markets and submarkets with some experiencing more demand than others over the next 12 to 18 months. The report noted metros including New York, which is expecting about 40,000 units to deliver this year, Boston, Chicago and Philadelphia could have employment growth below the national average of 1.2 percent.
Several Texas metros, including Austin, Dallas and Houston, are expected to see job growth higher than 2.0 percent. Currently elevated levels of new multifamily supply are expected to keep supplies in balance but Dallas could be undersupplied by 2021 even with more than 18,000 units delivering this year.