Ones to Watch

Three multifamily experts share their top 10 markets to watch in the year ahead

Looking back over the past 12 months, there were a number of factors that affected rents in the multifamily sector, as things like the government sequestration, the fight over Obama Care and weather disasters all had a hand in bringing certain real estate markets down.

As we embark on 2014, the economy is looking stronger, and optimism abounds in many places. We asked three multifamily experts to offer their Top 10 markets to watch in the year ahead.

G. Ronald Witten
Witten Advisors LLC

G. Ronald Witten, president of Dallas-based Witten Advisors LLC, sees big things ahead on the West Coast, with eight of the firm’s projected Top 10 markets for rent growth tilted on the left side of the country.

“When you look at the San Francisco Bay area, all three of those component metros make our Top 10 list,” he says. “The Oakland East Bay area has the most upside in rents in part because there’s not as much new construction going on there and in part because San Jose and San Francisco have already seen dramatic rent increases. We think the whole area will stay towards the top of the heap.”

Beyond that, Witten foresees the Pacific Northwest, Seattle, and Portland, Ore. as three areas that look strong.

“Those are all very good and all of those economies are very dependent on the tech business, which is where a substantial share of the growth in the U.S. and global economies is happening,” he says. “As you move elsewhere on the West Coast, we would expect to see Los Angeles perform a little better than its neighboring coastal counties, outperforming Orange County and outperforming San Diego, so L.A. is on our Top 10 list.”

For a little of the same reason relative to the East Bay and Oakland, two other inland California markets that have been very late to the recovery that Witten feels will begin to show some life in 2014 are the Inland Empire and Sacramento.

“On the East Coast side, also a big beneficiary of technology is Boston,” Witten says. “Kind of the middle-of-the -country market on our list is Nashville, where we are seeing tremendous growth, as the health care business is important there, and big growth is happening there as well.”

Markets on the cusp of the Top 10 are Atlanta, Houston and New York City, and the possibility of a stronger U.S. economy could pop those up.

“If we get a broader recovery than just tech focus, maybe some of these other economies could get a bigger lift,” Witten says.  “I wouldn’t say there’s any one driver that will have a big impact on the list as we see it today.”

While Witten feels that every investment is a function of price, meaning at some price there are no markets to avoid if the price is attractive enough, there are still some markets he would shy away from.

“In terms of market fundamentals, we would expect to see Metro D.C. be one of the weakest markets next year,” he says. “As you get beyond that, maybe scattered markets like Indianapolis and Philadelphia look sluggish.”

Ron Brock
VP/General Manager

Ron Brock, vice president and general manager of Pierce-Eislen, located in Scottsdale, Ariz., says that his Top 10 list of markets to watch in the upcoming year is projected to have a combined 6 percent rent growth in the next 12 months.

He also believes his list is going to surprise some people, because some markets that were doing well this year are not going do very well next year.
“If you look at the Bay area of Northern California, it’s all very good. You have the East Bay market, the San Francisco Peninsula and the South Bay/Silicon Valley market,” he says. “There are good jobs there. Like everything else, a composition of jobs brings some good income.”

Austin, Texas is also on his list, and while Brock admits that it does seem to be overbuilding right now, the jobs being created are very attractive and pay handsomely, boding well for its future.

“Other markets to say “yes” to in 2014 are West Palm Beach, Boca Raton, suburban Atlanta, which is a surprise, Miami, Denver, Orange County and the Southwest Florida Coast,” Brock says. “West Palm Beach is interesting because job growth isn’t so much a factor, but it’s the empty nester crowd. Retirees go there and are willing to pay. Same thing with the Southwest Florida Coast­—people are showing up with money.”

Miami meanwhile is being driven by money from outside the country, most notably South America. Suburban Atlanta is seeing an increase in job creation, which is the complete opposite of what’s happening in urban Atlanta. Denver also keeps rolling with new jobs being added.

“Most of these markets are lifestyle markets. People don’t leave even if they lose their jobs: They move there because they like the environment,” Brock says. “Miami, Austin, all the Bay areas and the three Florida areas are included in that.”

On the cusp of cracking his Top 10 is Fort Worth, Texas, and he sees most of Texas doing well in 2014.

Brock had a lot to say about the markets that need to be watched with a careful eye and aren’t expected to do much in 2014.

New developments are on the rise, Brock says, due to the top end of the market, which is comprised of people with money, retirees and empty nesters who have income and wealth but just don’t want to own anymore, as well as young professionals, double income/no-kids households.

“On the other side of it—for renters by necessity—the jobs aren’t there,” he says. “There’s too much supply coming on and not enough demand. You can’t do much if you don’t have the jobs. Job creation is a tough one. If you believe what’s going on with Obamacare, it’s going to lead to job loss. These are going to be hit the hardest and already getting hit.”
Markets that he deems “in trouble” are Washington D.C./suburban Maryland, urban Chicago, urban Philadelphia, the Carolina Triangle, Tucson, Ariz., Baltimore, Northern Virginia, the Richmond/Tidewater Region, Albuquerque, N.M., and both urban and suburban Boston.

“The sequestration has clearly had a serious impact on some of these markets, and we can expect with Obamacare, there’s not going to be a huge increase in jobs in these markets,” he says. “It’s unpopular to talk about, but if you think of it as a bell-shaped curve, with really good and really bad, that group is on the wrong end of the curve.”

John Sebree
Director of National Multi Housing Group,
Marcus & Millichap

John Sebree, director of Marcus & Millichap’s National Multi Housing Group, sees a number of factors paving the way for his Top 10, including job growth, cap rates and nearby transportation.

In Denver, for instance, the light rail expansion is guiding many investors to purchase older assets along designated routes and the area along the I-225 rail line has also been popular.
“Though strong development will threaten apartment vacancies in select submarkets this year, strong job growth and household formations should help stabilize occupancy trends,” he says.

The rest of his Top 10, in alphabetical order, follows.

Apartment owners in Los Angeles will enjoy relatively tight vacancies in 2014, though he expects new construction will begin applying pressure in the western stretches of the county by year end.

“Job growth will accelerate to its highest pace since the recession, bringing overall payrolls within reach of pre-recession levels for the first time in seven years,” Sebree  says. “Although hiring will be broad-based, a significant share of the new jobs will occur at both ends of the pay scale impacting a variety of apartment types.”

Marcus & Millichap researchers predict New York will retain one of the lowest vacancy rates in the country this year despite increased development as increased hiring and expanding new businesses support absorption. In Manhattan, cap rates average approximately 5 percent for performing market-rate assets and they dip to the 3 percent range for rent-stabilized buildings. In the borough of Brooklyn, most assets in established neighborhoods will trade in the mid-6 percent range.

Close by in northern New Jersey, the renter’s base will expand as the high rents in Manhattan encourage people to search for rentals throughout the six-county region. Apartment operators in Essex, Hudson and Bergen counties have already benefited from this trend, with vacancies remaining under 4 percent.

Sebree says apartment supply is surging in Orange County, Calif. again, which will lift vacancy in select submarkets and ease the pace of rent growth.

“Nonetheless, vacancy will finish the year beneath the 5 percent threshold, which is widely considered a benchmark for full occupancy,” he says. “Employment gains in nearby Newport Beach should help alleviate some of the pressure from new construction late in the year, particularly in southern Orange County.”

In Portland, Ore. Marcus & Millichap researchers foresee developers ramping up construction to 3,000 rentals in 2014, an increase from 2,000 units last year. Vacancy will remain very tight, though the new completions will push up the vacancy rate 30 basis points to 3.5 percent.

“Rent growth will trend above the national rate as effective rents finish the upcoming year at $1,026 per month, a 3.8 percent annual rise,” according to Sebree. “After much of the rent growth has been realized in primary markets, and cap rates hover near all-time lows, some buyers will target Portland to allocate 1031-exchange capital for higher returns,” he adds.

In San Diego, with housing affordability limited, apartment operations will maintain strong performance into the coming year, particularly near the coast in North County San Diego. An influx of construction, however, will put pressure on vacancies in Downtown and the surrounding neighborhoods. Value-add opportunities are highly sought-after in the communities of North Park, University Heights and South Park.

“The investment outlook in San Jose will remain bright through the first half of the year, but rent gains will become more challenging as the year progresses,” Sebree says. “In ultra-tight submarkets, including Mountain View/Palo Alto and Santa Clara, investors with long-term hold strategies will continue to pay a premium to secure assets. Class B properties in these areas typically change hands at a 5 percent pro-forma cap rate.”

Sebree believes the effects of higher rents and new development will result in mixed apartment operations in San Francisco this year, though the market will remain among the healthiest in the country. Currently, rents are more than 16 percent above the level in the dot-com boom in 2000, though payrolls remain 9 percent below that period.
For Seattle-Tacoma, apartment completions accelerated in 2013, with the momentum carrying into the coming year, but strong apartment demand will help the Seattle metro maintain sound fundamentals.

“Building is concentrated within the city’s urban core, as downtown and adjacent areas north of downtown account for nearly 60 percent of all deliveries this year,” Sebree says. “Although this part of the metro is vulnerable to oversupply, broad-based job growth will support demand for area rentals. Employment rose nearly 4 percent above the pre-recession high by year end.”

When it comes to high-risk markets, Marcus & Millichap Research Services sees 10 to watch as Cincinnati, Cleveland, Columbus, Ohio, Indianapolis, Jacksonville, Fla., Kansas City, Mo., Las Vegas, Nashville, Tenn., St. Louis, and Tampa/St. Petersburg, Fla.

When it comes to tertiary markets, the Marcus & Millichap team sees them remaining increasingly active, predicting they will likely continue to draw investor interest in 2014. “With broad-based performance gains supporting apartment fundamentals nationally, apartments in tertiary markets have seen a significant performance boost,” Sebree says. “Tertiary markets have yet to see overdevelopment risks materialize. They could quickly manifest, but few have substantive risks on the immediate horizon. In addition, yields remain highly attractive in these markets compared to primary and even many secondary markets, where cap rates have flattened at very low levels.”

To comment on this market report, e-mail