Freddie Mac Research Projects Strong 2019 Market

Steve Guggenmos, Freddie Mac Multifamily Research and Modeling Vice President

Freddie Mac expects another strong year for the multifamily market in 2019 with solid rent growth—projected at a nationwide average increase of 4 percent—and vacancies continuing to perform at historical averages. The company’s outlook for this year also reveals that origination volume is estimated to grow to $317 billion from about $305 billion in 2018 despite rising interest rates.

Those numbers are expected to be strong this year, even as new supply will remain elevated through 2020. The Freddie Mac Multifamily Outlook notes robust demand related to changing demographics and consumer preferences continues to push rents up, driving vacancies down. Apartment rents have consistently increased over the past several years, at an average 4.4 percent per year since 2012—and in some areas with strong employment gains such as Seattle, rents were up about 8.4 percent annually over the past six years. But Freddie Mac expects higher increases in the cost to own versus the cost to rent will continue to support apartment demand.

“Along with demographic trends and the shift in consumer preferences toward urban areas, we examine the comparatively high cost of homeownership by market and that is another important factor that will continue to drive healthy performance in the multifamily market,” Steve Guggenmos, Freddie Mac Multifamily Research and Modeling vice president, said in a prepared statement.

Costs of owning vs. renting

The company’s report notes that it has been about 10 years since the cumulative cost to own was less than the cost to rent. But those costs have been soaring since that time, with Freddie Mac estimating that the cost of ownership has increased by 60 percent from 2013 to 2018 compared to rents rising 30 percent over the same time period.

In 2018 alone, the cost to own has increased by 12.1 percent due to house price increasing by 4.8 percent and mortgage rates gaining 70 bps, the outlook stated. The trend is expected to continue into 2019, with the cost to own inching up nearly 10 percent, while rent rates are projected to increase by 4 percent.

“Over the last three years, the cost to rent has gone up 14 percent but the cost of ownership has gone up close to 24 percent,” Guggenmos told MHN. “Millennials or others were on the fence a year ago and two years ago considering should they buy or should they rent, it’s becoming harder to buy, financially. That may create additional support for the rental market.”

Rents will vary across markets with rents above historic averages projected for Colorado Springs, Colo.; Charlotte, N.C.; Fort Worth, Texas and Denver. But even in areas with slowing rents like New York City; Washington, D.C.; Riverside, Calif.; Norfolk, Va., and Orange County, Calif., rent growth is expected to surpass the target inflation of 2 percent, the report noted.

Strong market fundamentals, such as increasing rents and investor demand, are among the reasons why multifamily origin volume is expected to grow in 2019. Guggenmos also noted that Freddie Mac looks at property prices as one of the strongest drivers.

“We think property price appreciation is still in the double digits year over year,” Guggenmos said. “When prices go up, it incentivizes people to invest in properties or refinance properties; that creates demand for debt. We had expected it to slow down a little more but it has continued to outperform, certainly in 2018, in double digits.”

Cap rates have fallen slightly over the past few quarters despite rising interests, and spreads remain near the long-run average. Freddie Mac anticipates cap rates may rise in 2019 if Treasury rates move above 2018 highs.

“Since the third quarter, the Treasury rates have become more volatile. But they have moved back down a little bit,” Guggenmos told MHN. “We continue to watch what happens with the Treasury rates […] cap rates are in good place. Because Treasury rates are so much more volatile, it takes a sustained move upward in Treasury rates to move cap rates.”

Image courtesy of Freddie Mac