Finance Forecast for 2016

Millennial and overseas demand will drive multifamily in 2016.
Secondary markets like Denver (pictured) will be more attractive to international investors.

Secondary markets like Denver (pictured) will be more attractive to international investors.

Even as 2016 is shaping up to be the best of times for most multifamily markets, there are some markets that will likely lag. With U.S. multifamily continuing to be a globally sought-after asset class, investor demand will stay strong. This bodes well for most multifamily markets.

According to Steve Guggenmos, Freddie Mac’s director of multifamily research and modeling, “Our forecast is that there will be continued strength in the market. We see vacancy rates going from somewhere in the range of 4.5 percent at the end of 2015 to maybe 4.9 percent at the end of 2016, with new supply. But that continues to be lower than the long-run average. And we expect that rent growth will be consistent with a strong occupancy environment.”

Freddie Mac’s forecast calls for multifamily income growth nationally to average 2.4 percent in 2016, based on the top 70 metro areas. While Freddie Mac expects that rental growth in most metro markets will slow down, it is still likely to be above the average growth seen historically.

Prices more favorable in secondary and tertiary markets

Mark Alfieri, CEO of Monogram Residential Trust

Mark Alfieri, CEO of Monogram Residential Trust

While international investors are likely to continue to favor major gateway cities—such as San Francisco, New York, Los Angeles and Boston—other multifamily markets can still expect to draw investors. Mark Alfieri, CEO of Plano, Texas-based Monogram Residential Trust, a real estate investment trust that invests in and develops multifamily property, said, “The reality is that there is so much capital looking at U.S. multifamily. It is the number one asset class for investors globally. There is still terrific demand in the coastal gateway markets, but it’s gotten very expensive, not only to buy but also to build.”

This demand is pushing investors to look to suburban markets and more of the secondary and tertiary markets in order to pursue yield, according to Alfieri, which bodes well for markets such as Phoenix, Atlanta and Denver. Another way investors are trying to generate additional rents is by buying older properties and adding value to them with makeovers, such as putting in wooden flooring and granite countertops.

Even though the coastal markets are getting more difficult to develop in, Monogram is looking to increase its presence in those markets. This is based on the view that the hurdles investors face there will discourage many to the extent that there will be a major slowdown in supply in such markets in the next few years. Consequently, Monogram is looking to exit markets such as Orlando and Las Vegas and reduce its portfolio size in its Texas homebase in order to invest more in the coastal markets. Alfieri would like to hike up the REIT’s presence in Seattle and suburban New York.

Following the Millennials
Another investor strategy is to focus on markets that the Millennial cohort, the older members of which are in their prime renting ages of 20 to 34 years, favors. As job growth picks up in 2016, a pent up demand for apartment rentals is likely to emerge from this generation whose tendency is to delay marriage and homeownership.

This demographic tends to be drawn to cities that offer job opportunities as well as a lifestyle that appeals to them. According to Ella Shaw Neyland, president of Irvine, Calif.-based Steadfast Apartment REIT, a multifamily investor and developer, “The Baby Boomers were considered to live to work, as we were focused on working. And the Millennials work to live. So they want to live somewhere where they like living there.” This is an advantage for markets such as Austin, Texas; Nashville, Tenn., and Denver.

However, even within the markets that draw Millennials, there are certain preferred neighborhoods. Downtown areas that offer live-work opportunities continue to be a draw since Millennials tend to prefer walkable areas that are close to their workplaces. There are also other infill neighborhoods in the suburbs of metro areas that are becoming more urbanized and drawing Millennials.

Overbuilding casts a shadow
One area of concern for 2016 is the amount of supply that has been added at the higher end of the market, particularly in urban downtown areas. These luxury rentals are beyond the reach of most younger renters who are driving apartment demand. Washington, D.C. is one such market in which the supply being added remains a concern.

Another market of concern is Houston, which has seen additional supply while demand is expected to drop off as the local economy is impacted by the slide in oil prices.
While the potential of rising interest rates also creates some uncertainty for 2016, it is also a positive sign of a strengthening economy that will drive demand for apartments.
While cap rates are also likely to go up with interest rates, affecting property values, they are likely to move up at a slower pace.

According to Neyland, “The best thing that could happen to us would be that the economy starts to strengthen and we start to get some level of inflation and maybe a more normalized interest rate. A good economy, just like a rising tide, rises all ships. I think that’s a positive.”